Opinions on worst case real returns...

[eta2020]

S&P 500 Dividend by Year

However if you lived of off dividends only (not selling equities) then only 20 year period starting in 1928 would somewhat hurt you.

Dividends for most part at least maintained its real values even during hard times.

So I would simplify argument to stating worst come to worst you can count only on dividend yield and make living from it and you will be fine.

 

[LARS]

I have two references for the worst case to expect. Both are for blended portfolios with retirement withdrawals and adjusted so that a level return assumption can be used and still account for sequence of return risk. This is handy for plugging into your planning spreadsheet and not having to deal with Monte Carlo analysis.

First, Jim Otar in "Unveiling the Retirement Myth", chapter 20, claims that a 50/50 portfolio undergoing 2% withdrawals has only 10% chance of doing worse than 3.4% nominal over 30 years. He assumes 3% inflation, so that's 0.4% real. (There may be other cases for allocation and w/d rate.) median was 5.2% nominal and "lucky" case - best 10% was 7.2%.

Wade Pfau did and article for Advisor Perspectives. Link here: New Research on How to Choose Portfolio Return Assumptions - Advisor Perspectives

He estimates, based on history from 1926 to 2011, that the worst 1% case over 30 years is -0.4%. (See table 2.) Pfau gets 1.9% real for his 10th percentile case, which differs a bit from Otar. YMMV.

These both start with historical returns, so you still have to ask yourself is it really different this time? Is our future to be worse than the Great Depression?

My plan works with Pfau's -0.4% real, the 1st percentile horrible case. If it is worse than that, will just have to adapt.

Thoughtful response. Thank you.

 

[LARS]

Bogle has an insight and opinion too.
I do believe the 7% historical equity portfolio return is too often quoted without looking at the realities of the 2000 to 2016 time - where the market return has clearly been far below that magic 7% rate.

2% to 4% seems most likely but if you're asking for a worst-case -then certainly something negative along the lines of -1% to -4% nominal return seems absolutely rational.

the question then would be whether or not our portfolios will survive with that level of wealth destruction. It would require significant belt tightening and/or increased portfolio beta.

Personally I have always planned at 4% nominal (of which 2.5% is dividend yield 1.5% is market return) , 3% inflation,
Netting 1% real equity returns.

I hold a 90% equity portfolio comprising 75% broad USA equities and 25% intl equities.

I hold 10% in gold ole cash but not opposed to going to 5% cash if an opportunity presents itself.
Zero bonds.

Thank you . Thoughtful response.

 

[LARS]

Table from https://www.aqr.com/~/media/files/papers/aqr-an-old-friend-the-stock-markets-shiller-pe.pdf. Scatter plot is from Meb faber's website.

Thank you.

 

[alaska55]

I have a hard watching these things but this one is interesting, plus I wouldn't call Rob Arnott a talking head as he rarely is on financial porn.

Rob Arnott presentation: https://vimeo.com/167847506/8f5a43d73f

 

[papadad111]

What were the best and worst 20-year periods to own US stocks? Well, if you bought in:

1941: the return was about 15% per year for the next 20 years, or

1979: 18% annual return



The worst years to buy were:

1928: the return was about 2.5% for the next 20 years

1958, 59 & 61: about 5-5.5% annual return



On average, 20-year returns were the same as 10-year returns -- around 10% per year.

I looked for an updated graphic but couldn't find one. Certainly to me a worst case scenario would be the entry to one of our prolonged bear or flat markets just as one enters retirement ... Sequence of return risk.

 

[W2R]

So had a discussion with a former colleague about worst case real returns given current outlooks. His view was conservative worst case scenario was 2% negative returns.

Others opinions? (Again WORST case real returns.)

I think that predicting real returns is a legitimate concern when in the accumulation phase, and planning for retirement. Years ago when I was in the accumulation phase, I assumed 5% total yield, of which 3% was inflation.

Now that I am retired, I don't see much need to predict returns. My attitude is that whatever the returns are, well, that is what they are. The only buying and selling that I do is in order to rebalance at the beginning of each year. I take my dividends in cash, and each year I spend the previous year's dividends. If the dividends have dropped, then I spend less. If needed I have a cash buffer.

Since most of my portfolio is in broad index funds, I am well diversified and feel OK with my approach, and with just waiting out any slump in returns.

 

[RISP]

I think that predicting real returns is a legitimate concern when in the accumulation phase, and planning for retirement. Years ago when I was in the accumulation phase, I assumed 5% total yield, of which 3% was inflation.

Now that I am retired, I don't see much need to predict returns. My attitude is that whatever the returns are, well, that is what they are.

Interesting, my thinking is exactly reversed. As long as I'm accumulating, it's all fun and games. If my return assumption was too optimistic, I work longer before I'm FI. If returns are better than expected, woohoo!

But once you retire, you can no longer afford to be way off target; at least not for an extended period of time. Otherwise you might either draw too much, or deny yourself the standard of living your portfolio could actually support. Yes, one of those options is a lot worse than the other.

 

[GTFan]

Her point is that once you've pulled the FIRE trigger there's little more you can do about it other than manage expenses, if needed. You're on automatic pilot with the portfolio that you chose (for the most part), as you should be.

 

[RISP]

Her point is that once you've pulled the FIRE trigger there's little more you can do about it other than manage expenses, if needed. You're on automatic pilot with the portfolio that you chose (for the most part), as you should be.

How's that different from someone still working? It's not that they can influence market returns.

 

[Spudd]

How's that different from someone still working? It's not that they can influence market returns.

They can delay retirement to keep saving.

 

[ESRwannabe]

Its possible that the only way to make any progress in the next few decades will be to lower expenses. Increasing one's revenue may not be possible.

I've been reading up more and more on expating. The US may be too expensive for me to live here at some point.

If I were willing to move to Thailand, say Chiang Mai as an example, then I could retire right now. Here in the US my investment income can only cover around 75% of living expenses.

One fortunate thing I have going for me is my work experience is in IT. With the popularity of "cloud computing" I could theoretically get an IT sys admin job working remotely. From what I have read Chiang Mai is the number one "digital nomad" spot currently.

I have been considering that at this point it might be more beneficial for me to bone up on my "dev ops" skills, get some certs in "AWS" or "Azure". Then go expat and work part-time telecommuting. Given my current savings (generate around $21k mostly from dividends) I would have plenty to fall back on if needed.

In the US I live on around $28k. I believe in Chiang Mai I could easily live off around $12k-$15k.

 

[W2R]

In the US I live on around $28k. I believe in Chiang Mai I could easily live off around $12k-$15k.

Maybe this would be helpful to you (or maybe not). Anyway here it is.

https://en.wikipedia.org/wiki/List_of_lowest-income_counties_in_the_United_States

 

[RISP]

They can delay retirement to keep saving.

And a retiree can get back to work.

 

[audreyh1]

And a retiree can get back to work.

A retiree can't just go back to a job they left. And the more years retired, the harder it is to resume any prior career.

if you are retiring completely (no consulting, no part time gigs in your field), you better be prepared for this. If you do go back to work after a few years, you're likely to make a lot less than you did before you quit and it will take years to rebuild a career, so avoid quitting until you're really ready.

 

[LARS]

And a retiree can get back to work.

Speak for yourself! Me. Nope. Way too long out of practice for such a drastic measure. ;-)


Sent from my iPad using Early Retirement Forum

 

[RetireAge50]

If we go with a 3% real return what we are really saying is it will take 24 years to double our money (using the rule of 72).

To me this illustrates how conservative this estimate is. Does it really take a legitimate business 24 years to double its money?

If we go ahead and be conservative and use 3% real anyway what should we do if stocks tank 50%? Increase our estimate to 6%? If we stick with 3% after they fall then we are saying we expect it to take 48 years to double the original amount.