What are Your Assumed Rates of Return?

[Tekward]

An interesting article that postulates that low interest rates are here to stay and the choices for future retirees will be to work longer, save more, or get by with less:

PIMCO | Viewpoints - What

My spreadsheet assumes a rate of return of -1% (if I keep up with inflation it would be zero). What rates are others using?

 

[GrayHare]

I'm figuring a 2% real return. I believe that's close to the century+ norm.

Wouldn't a negative real return mean we'd be better off cashing out investments and stuffing the mattress with Benjamins?

 

[truenorth418]

On a long term basis, I assume 6% total return for the broad indices, a little more for small caps and real estate.

 

[Original Wally]

I am "inflation+ 3%"

 

[ShortInSeattle]

On a long term basis, I assume 6% total return for the broad indices, a little more for small caps and real estate.

Ditto. 6% minus inflation for the "real return"

 

[gerrym51]

i use 2 percent

 

[W2R]

When I was in the accumulation phase, I was assuming a gain of 5%; 3% inflation + 2% on my investments.

Now that I am retired, I just hope to tread water and see gains that approximately equal inflation.

In the past five years we have had a severe market crash, a housing crash, and a crisis in health care costs, all bad for retirees. The one calamity that hasn't happened lately is out of control inflation. So far, so good, but then maybe I am whistling in the dark. If my investments would keep pace with inflation then it would not be a problem, but if they fall too far behind it's back to the spreadsheets and LBYM for many of us.

 

[RobLJ]

I had run the plan in Quicken based on 8%. When changed to 7%, it runs out at year 35, although house and other assets remain. Some tweaks in spending or timing of retirement obviously remain.

 

[David1961]

My assumption is that I will keep up with inflation. Will probably do better, but I always want to make my assumptions conservative.

 

[ejman]

I dunno what to expect. Moved to our little ranch in SW Oregon in 1999 contemplating FI/ER which finally happened in 2002. Since our move, there has been the crash of 2000-2002, the Maxi crash of 2008, the real estate implosion, 9/11, the two wars, the gridlock in Washington, my back going out, drought, famine, pestilence, global warming, hurricanes. As that general said, enemy in front, enemy behind, enemy to the left, enemy to the right, condition optimal - attack!

 

[Tekward]

Wouldn't a negative real return mean we'd be better off cashing out investments and stuffing the mattress with Benjamins?

For example a 4% interest during 5% inflation would be a -1% return. In a mattress it would be -5%.

Of course that is very simplified, leaving out fun stuff like taxes.

 

[Tekward]

30 Year Real Rates of Return

Here's a nice perspective that says that layered risk premiums can deliver up to 7.5% beyond inflation. Note that the addition of the higher risk layers will also increase variability.
The Portfolio Solutions 30-Year Market Forecast for 2012 « « Portfolio Solutions Portfolio Solutions

 

[KM]

I am assuming 5% return and 4% inflation. I think we are in good shape unless inflation goes up too high, as DH's pension is non-COLA.....which means we would have to start making up a more ground elsewhere to compensate, if that should happen. I have the option of making my pension COLA, which I will be doing.

 

[67walkon]

Assume 4% return, but have been doing much better the last 2 years. We don't have any debt, so I tend to ignore inflation, though I know it will be an issue down the road. Hopefully, my actual return will exceed 4% by enough to cover the inflation.

 

[zakenjanei]

With the current low bond yields and the uncertainty about future stock returns, I see how folks would expect low rates of return like 2%, or even lower. However, wouldn't buying a 30-year TIPS with a 2.75% coupon essentially give me a guaranteed 2.75%+inflation? Couldn't this be considered a floor rate of return? Am I missing something?

I understand TIPS phantom tax implications, especially during high inflation periods, but as a rate of return, that seems to be pretty good conservative strategy.

 

[GrayHare]

Are 30-year TIPS paying that high? I thought it was more like 0.5%.

 

[zakenjanei]

Yes, you're right...The most recent 30-year TIPS yield was 0.75%...The 2.75% is for a 30 year treasury bond.

Recent Note, Bond, and TIPS Auction Results

 

[foxfirev5]

Anything above 0 real is a bonus for me.

 

[HighRoller]

2.75% for me

 

[SJ1_]

My assumption is that I will keep up with inflation. Will probably do better, but I always want to make my assumptions conservative.

That is also my assumption.

 

[pb4uski]

My deterministic plan assumes a 5.5% nominal rate of return on a 56 stock/38 bond/6 cash mix and 3% inflation, so a 2.5% real rate of return.

The 5.5% is based on the 8.6% average annual return of a 60 stock/40 bond portfolio from 1926-2011 according to Vanguard and judgmentally adjusted downward to be conservative and reflect the new normal (if there is such a thing). I think/hope a 3.1% haircut is sufficient.

 

[Midpack]

I assume 1 ± 1% real return, rarely look outside that range long term, but we're prepared for lesser returns. And if returns are better than we plan, there are plenty of worthy causes we'd love to support even more...

 

[braumeister]

Long term, my projections always assume a return equal to the inflation rate. Short term, I assume a one or two percent real return.

 

[timeasterday]

I use 2% real return in my spreadsheet for a 75/25 portfolio (17 years from retirement).

 

[akck]

I use multiple return rates to determine at what rate my plan will fail. So far, anything above 1% will lead to a successful outcome. I also use an average 3% inflation rate, any inflation-based income increases limited to 2.5%, projection out for 35 years and an retirement balance less than where I currently stand. Hopefully all of these conservative factors will ensure a successful outcome.