FIRE planning with conservative rate of return

[Gunny]

I guess I am a pessimist hoping for the best. Although I am invested nearly 80 in S$P 500 and DJI index funds (rest in bond funds), I always use 6.5% rate of return for future planning purposes (forecasting my nest egg for retirement). I plan to FIRE myself in six years. Is 6.5% realistic? What rates of return are others using for a portfolio similar to mine?

 

[Ed_The_Gypsy]

I am using 6% for planning out 25 to 30 years with an almost 100% equities portfolio that avoids the S&P and DJI (~ growth and blue chips). I prefer value, small cap and dividend-payers.

When interest rates go up again, and they will, your 20% in bond funds is going to lose principal. I am guessing that in 6 years (a short time horizon) you will be lucky to have gotten 5%.

 

[pb4uski]

The historical return for an 80/20 fund is 9.4%. See https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

It would seem to me that 6.5% is sufficiently conservative.

I have a 60/30 AA and use 5.5% in my planning, even though the historical average is 8.7%.

 

[photoguy]

Is 6.5% realistic?

Are you using 6.5% for your entire portfolio or just the equities part? Is this real or nominal?

Even for just equities I think 6.5% (real) is on the high side. 1/PE10 would give you between 4 and 5%.

 

[Gunny]

Are you using 6.5% for your entire portfolio or just the equities part? Is this real or nominal? Even for just equities I think 6.5% (real) is on the high side. 1/PE10 would give you between 4 and 5%.

Just the index funds. the ten year ROR for the S&P 500 index fund being over 7% and the 10 year ROR for the DJI index fund being over 9%. Both funds have really low expense ratios. These are all in my TSP account. With this in mind I thought I was being conservative planning for a 6.5% return.

 

[photoguy]

See also this paper from vanguard:

https://personal.vanguard.com/pdf/s338.pdf

Turning to real returns, we estimate a
slightly greater than 50% likelihood that over the 2012–2022 period, the broad U.S. stock market
will earn at least a 5% average annualized real return. As such, we feel our expectation for the forward real return is quite in line with the historical average of 6.8% that has been observed since 1926,

Note the above numbers are real geometric returns (vs arithmetic/nominal).

Edit: said another way, there is a 50% chance that over the next ten years returns will lag historical returns by at least 2%.

 

[jebmke]

I always do my plans using real rates. Right now, I am using 0-.5% for bonds and 4-5% for equity.

 

[walkinwood]

I think your rates are conservatives, but what about your AA. What happens if the market suddenly drops 50% this close to your ER?

Do an exercise & compare what your final tally will be if you have a 80/20 and a 60/40. You may be surprised by how little you give up to get a much smoother ride.

 

[retire2020]

I'm using 6% total return(AA 65/35 stock/fi) including inflation for my calculation. I'll then have 55/45 AA when I retire and five years later 50/50..I'm keeping 6% total return for entire retirement years(Age 55-93) for planning purpose.

 

[Gunny]

I think your rates are conservatives, but what about your AA. What happens if the market suddenly drops 50% this close to your ER? Do an exercise & compare what your final tally will be if you have a 80/20 and a 60/40. You may be surprised by how little you give up to get a much smoother ride.

Good points. My target FIRE age is 56. If market has a significant bear period I will just retire at a later time. Within three years of October 08 I more than made up for my losses in equities.

 

[eta2020]

I am 100 % in stocks all my life. 6.5 % is what I use...... Usually within 2-5 years it is much better or much worst then 6.5 %.

 

[RobLJ]

I guess I am a pessimist hoping for the best. Although I am invested nearly 80 in S$P 500 and DJI index funds (rest in bond funds), I always use 6.5% rate of return for future planning purposes (forecasting my nest egg for retirement). I plan to FIRE myself in six years. Is 6.5% realistic? What rates of return are others using for a portfolio similar to mine?

I think 6-6.5 or a 3-4% real return is reasonable, over a 20 year period.

 

[galeno]

Our SWR = 3.0%. TER = 0.75%. Over the next 40 years our 60/30/10 retirement portfolio has to generate a net REAL return of 1.67% to accomplish this.