What are we all using for inflation/investment return rates?

[calmloki]

Others have reported 100% success rates per Firecalc at 100 year lifespans - bettern me McGee! I make attempts with Firecalc and the Quicken retirement calculators but can make them say about anything, depending on my pessimism at the moment. I read about historical returns and anticipated lower future returns and don't know what to use Doesn't help that we have little in the way of SS benefits or IRA money, no pensions, and mostly rental property income or very short term and variable hard money loan income.

I've been using 3% as an inflation rate and 3.5% as a rate of return in Quicken and pretending we sell all the rentals in 2019 for what the tax man says is their real market value. Assuming 28 years of retirement left and no wild desire to leave an estate.

 

[Big_Hitter]

Others have reported 100% success rates per Firecalc at 100 year lifespans - bettern me McGee! I make attempts with Firecalc and the Quicken retirement calculators but can make them say about anything, depending on my pessimism at the moment. I read about historical returns and anticipated lower future returns and don't know what to use Doesn't help that we have little in the way of SS benefits or IRA money, no pensions, and mostly rental property income or very short term and variable hard money loan income.

I've been using 3% as an inflation rate and 3.5% as a rate of return in Quicken and pretending we sell all the rentals in 2019 for what the tax man says is their real market value. Assuming 28 years of retirement left and no wild desire to leave an estate.

3% inflation and 3.5% real return for a 3 year projection or are these long-term assumptions?

Most investment consultants' reports I've read are using something closer to 2.25% long term; your real return will depend on your long-term asset allocation.

One thing you could do is run optimistic and pessimistic scenario's using the SS trustees' assumptions.

 

[pb4uski]

For my QLP projections I use 5.5% nominal return (severe haircut to historical return for a 60/40 AA, and a bit lower than projected 10-year returns for such a AA by Vanguard and others) and 2.7% inflation... so a 2.8% real return.

 

[Big_Hitter]

For my QLP projections I use 5.5% nominal return (severe haircut to historical return for a 60/40 AA, and a bit lower than projected 10-year returns for such a AA by Vanguard and others) and 2.7% inflation... so a 2.8% real return.

I think that's very reasonable

 

[COcheesehead]

2.5% inflation. I think the Fed uses 2% as their target, but they are not going to be that precise.
For returns I use 2.5%. Just being ultra conservative. I think my current allocation model has returned about 7% over the long term, but I don't want to be that optimistic.

 

[Midpack]

0-2% real return here.

 

[pb4uski]

I think that's very reasonable

I figured that you would since you are a reasonable guy.

 

[Danmar]

I don't use any forecast. Retired ten years, just spending divs. I'll take whatever the market gives me. Not sure how important forecasting is once you have settled into retirement?

 

[Big_Hitter]

I don't use any forecast. Retired ten years, just spending divs. I'll take whatever the market gives me. Not sure how important forecasting is once you have settled into retirement?

if you don't you may run the risk of actuarial ruin

I think this is a must read - https://www.amazon.com/Money-Life-Lifetime-Retirement-Paycheck/dp/0985384603

I've read about half of it and it's outstanding.

 

[braumeister]

I just assume (yeah, I know) that I will always have a real return on investments that is slightly positive (at least 1%) over inflation and that my expenses won't go up more than the general inflation rate.
Nearly 15 years since ER and so far, so good.

 

[pb4uski]

I don't use any forecast. Retired ten years, just spending divs. I'll take whatever the market gives me. Not sure how important forecasting is once you have settled into retirement?

if you don't you may run the risk of actuarial ruin. ...

If Danmar is ruined then a whole lot of us are in a heap of hurt and trouble.

 

[Whisper66]

I use 5% return and 2.5% inflation. I rerun our analysis yearly and will adjust as things change in the future.


Sent from my iPhone using Early Retirement Forum

 

[Big_Hitter]

If Danmar is ruined then a whole lot of us are in a heap of hurt and trouble.

Agreed, some don't need forecasting, those that do should note that actuarial ruin in retirement generally causes one of the following:

1) return to w*rk
2) move in with relatives
3) marry rich
4) live in a tent down by the river

(paraphrased from the book)

 

[RetireAge50]

I rerun our analysis yearly and will adjust as things change in the future.

+1 This is the key point.

Whatever return we guess for our estimates will be wrong. However, as long as we adjust every time we make a withdrawal the forecasted rate doesn't matter much.

 

[GravitySucks]

If Danmar is ruined then a whole lot of us are in a heap of hurt and trouble.

+1
If we're heading there I call dibs on the good Fridgedaire box.

I use whatever RIP uses for underperforming for what I care about.

For my fun n games spreadsheet a 1% real for bad case, a minus 7% for next four years followed by 3% for worst case, and 6% real Awesomest case.

 

[kcowan]

I assume that my portfolio returns will exceed my personal inflation rate by 0.5% and I use the resulting plan to decide when to make major gifts to charities and family.

So far, that has been extremely conservative (14 years).

 

[photoguy]

For bonds & cash, I use sec yield - inflation (2%). Basically this means that I'm expecting negative or zero return for everything except for those 3% Penfed CDs.

For equities, I use a real return of roughly 1/PE or 1/PE10 depending what I can find. This works out to about 4% US and 7% International.

 

[Totoro]

I have four standard scenarios in my planning spreadsheet: 0% real return, 3% real return and 4.5% real return. In addition I have a variable "expected" scenario. That's the mainline.

Expected is currently 2.15% real return, arrived by assuming:
* Fixed income: whatever my current rates are
* Equities: 6.5% nominal, after expenses and taxes: 2% dividend + 3% growth + 2% inflation - 0.5% costs and taxes.
* Inflation: 2%

Those four scenarios and expected SS (not much and very far away) gives me sense of risk and when I would run out of my money.

Since I have a potentially very long horizon (up to 75 years out) I don't do short-term deviations nor P/E multiple corrections.

 

[Cobra9777]

My planning spreadsheet uses 4.1% nominal and 2.5% inflation, so 1.6% real. Excluding cash and real estate, my AA is 60/40. So I'm quite a bit more conservative than the historical return for that AA. I put more weight on historical and Monte Carlo models when assessing portfolio survival. The spreadsheet helps with basic planning, tracking, and decision making.

 

[JustCurious]

Inflation for the last 5 years...

2011 3.16%
2012 2.07%
2013 1.46%
2014 1.62%
2015 0.12%
2016 1.01% (for the 12 months ending on June 30, 2016)

The average annual inflation for the last 5 years is 1.7% and the fed inflation target is 2%.

 

[Trooper]

Inflation for the last 5 years...

Thanks. Is that inflation as measured by the CPI?

 

[Danmar]

Ok I guess I do have some implicit forecasts. Like some others I simply assume my divs keep going up at least twice as fast as inflation. Inflation in Canada has been between 1-2%. This will keep my total cash flow increasing faster than inflation. Every once in a while I intend to sell down the portfolio for large gifts or purchases.

Can someone explain to me how they would change their behaviour in retirement based on forecasts rather than actuals. I under how forecasts would be useful in the accumulation phase.

 

[Cobra9777]

...Can someone explain to me how they would change their behaviour in retirement based on forecasts rather than actuals. I under how forecasts would be useful in the accumulation phase.

One example from my spreadsheet... the return assumption affects the projected tax-deferred balance at age 70 (I'm 55 now). That balance determines how much of the RMD will be taxed at various rates (15% vs 25%, possibly 28% or higher in my case). That, in turn, influences my decision today about how aggressively to convert to Roth. At low returns, which is my usual assumption, I can be less aggressive, converting only to the top of the 15% bracket. At higher return assumptions, I may choose to be more aggressive, possibly converting into the 25% bracket for instance.

 

[scrabbler1]

In my spreadsheet I assign separate inflation rates for medical expenses (10%) and all other expenses (3%). For my investments, I assign different rates of return for each bond fund, and a separate number of cents per share via dividends and cap gains in my stock funds.

 

[Whisper66]

Can someone explain to me how they would change their behaviour in retirement based on forecasts rather than actuals.

In our case, we have in our plans that there are two changes we can easily make to our future behavior if needed based on forecasts:

(1) Modify allowable budget for expenses - currently have a very high allowable budget based on current forcasts but can easily cut ~30%-50% from that if economy takes a dive.

(2) Change how aggressive we do Roth Conversions - currently making very aggressive conversions yearly but could cut back if things looked tighter.