What Investment Rate of Return do you Use?

[Danmar]

For those already retired why do you forecast total returns at all? I've been retired 9 years and just spend what divs I get. These are very easy to forecast. Some years total return is great others not so much. Why forecast total returns other than to project what my heirs might get? Actual divs seem way more useful and certain? Even if you are not a div investor, why forecast returns once retired?

[papadad111]

Quote:

Originally Posted by Dreaming of Freedom So if you use a real return of 0, does that mean you don't really need to inflate any numbers on your spreadsheet year to year? For example, if I need $40,000 for 30 years with a real return of 0% for both inveatments & expenses, then I need $1,200,000 (30 x $40,000)? Am I looking at this correctly? Racing for the FIRE finish line, but I don't know where it is.

Yes. Presuming 0 percent real return and presuming your spending budget today does not change over time, then the inflation rate is applied to both earnings and expenses. It stays apples to apples over time. And hence both the income and outflow are at present value.

[papadad111]

Quote:

Originally Posted by Danmar For those already retired why do you forecast total returns at all? I've been retired 9 years and just spend what divs I get. These are very easy to forecast. Some years total return is great others not so much. Why forecast total returns other than to project what my heirs might get? Actual divs seem way more useful and certain? Even if you are not a div investor, why forecast returns once retired?

For some retirees, dividends are not adequate to live off of. Others prefer to hold value stocks such as Berkshire Hathaway which does not pay out a dividend at all and thus one needs to forecast total returns. Finally, tax treatment is different in some cases for dividends versus capital gains.

[traineeinvestor]

I spent a lot of time playing with various average rates of return and variations in my personal inflation rate (both spreadsheets and on-line calculators).

Where I ended up most comfortable is assuming that over the longer term:

Equities - the dividend is the real rate of return
Bonds - the real rate of return is zero
Real estate - the net after everything including provisions rental is the real rate of return

And:

1. that I can give these rates of return a slight bump by using leverage but that comes with an increase in risk (I kept the mortgages on our properties when I FIREd)

2. if we get either high inflation or deflation for any length of time, my assumptions will probably be wrong

[eta2020]

Quote:

Originally Posted by Danmar For those already retired why do you forecast total returns at all? I've been retired 9 years and just spend what divs I get. These are very easy to forecast. Some years total return is great others not so much. Why forecast total returns other than to project what my heirs might get? Actual divs seem way more useful and certain? Even if you are not a div investor, why forecast returns once retired?

+1

Dividend yield was and is safer and more bankable than the expected return from buying and selling growth stocks and crossing your fingers that they will be up on the day you need to sell them.

[audreyh1]

Quote:

Originally Posted by NW-Bound Net worth keeping up with inflation after spending makes you happy? Oh man, there are people who expect more than that?

It hasn't always been true. There were long periods after bear markets when it wasn't. Finally by the end of 2012 we pulled ahead of inflation - compared to 1/1/2000, a tough compare.

[NW-Bound]

Quote:

Originally Posted by Danmar For those already retired why do you forecast total returns at all? I've been retired 9 years and just spend what divs I get...

I am not really forecasting total return, other than to expect it to at least match inflation over my retirement, which will in all likelihood be shorter than 30 years.

That is because I am spending more than the dividend, but if the total return at least matches inflation, I will not die broke and even leave some for my children.

[kcowan]

Quote:

Originally Posted by NW-Bound I am not really forecasting total return, other than to expect it to at least match inflation over my retirement, which will in all likelihood be shorter than 30 years. That is because I am spending more than the dividend, but if the total return at least matches inflation, I will not die broke and even leave some for my children.

I think Dan's point was simpler. If you are retired, what will you do if the forecast is too low? Go back to work? Cut back? Tough it out?

Personally, we toughed it out for the two years and changed strategy slightly for the better.

[NW-Bound]

If I can live on just dividend, which is just 2% for the S&P, then it can be simpler.

But as my WR is higher than that and eats into the principal, if the total return at least matches inflation (real return being 0), then a 3.3% WR will last 30 years, a 4% WR will last 25 years, a 5% WR for 20 years, etc...

Either case actually involves some expectations. People living on just dividends do expect that the divs will keep up with inflation, so that they can maintain the same living standards and still leave the stash intact for the heirs. I spend into my principal, so am prepared to see it shrink with time, but do expect that it will not go all the way to zero before I croak (I still have future SS to allow cutting back WR).

There's still no guarantee with either cases, but the lower the expectations, the better chance one will not get disappointed. I think it is tougher for the young ERs who need their stash to last longer, or people still in the planning stage who are anxious to see progress towards the end goal.

[Danmar]

Quote:

Originally Posted by papadad111 For some retirees, dividends are not adequate to live off of. Others prefer to hold value stocks such as Berkshire Hathaway which does not pay out a dividend at all and thus one needs to forecast total returns. Finally, tax treatment is different in some cases for dividends versus capital gains.

Forget about divs that was a bit of a red herring, once you have settled on a SWR eg 3-4% why forecast returns? Would anyone change their WR based on a forecast? I could see actuals causing a change in plan, but forecasts? It's sequence of return risk that comes into play during retirement. Do you forecast sequence of returns?

[DEC-1982]

Quote:

Originally Posted by Danmar It's sequence of return risk that comes into play during retirement. Do you forecast sequence of returns?

In FIDO RIP's planning, yes. For my specific asset allocation ...


Years 2016-2025 3.65% return (bad)
Years 2026-2035 6.06% return (normal?)
Years 2036-2045 5.38% return (normal?)
Years 2046-2055 13.61% return (must be a repeat of the roaring nineties)

Naturally, for the planning exercise, the first few years are bad, and the last few years are great.

[Danmar]

Quote:

Originally Posted by DEC-1982 In FIDO RIP's planning, yes. For my specific asset allocation ... Years 2016-2025 3.65% return (bad) Years 2026-2035 6.06% return (normal?) Years 2036-2045 5.38% return (normal?) Years 2046-2055 13.61% return (must be a repeat of the roaring nineties) Naturally, for the planning exercise, the first few years are bad, and the last few years are great.

That's close, but as we all know it's the big loss years that are the issue. If we always get positive results pretty easy to plan?

Doesn't sound like you are retired yet? I can certainly understand why you would forecast results during the accumulation phase. But why would you do it once retired?

[pb4uski]

For me, 5.5% nominal, 2.5% real. A significant haircut from the historical nominal and real returns of a 60/34/6 portfolio.

[RetireAge50]

$2M for 40 years at 0% Real is $50k per year. At 3% real is $87k. My goal is to spend evenly throughout so plan to pick a reasonable rate (something like 3% real) and then continually adjust spending (based on the fluctuating balance and decreasing years of life).

[petershk]

I've pretty much used 0% real for my projections just to be safe. I expect real to be better on average but it's gravy as long as portfolio keeps up with inflation. DW and I haven't seen our real spending increase in 3 years or so (mortgage) and not much outside that in 5 years so the fact that medical will likely outpace cpi will hopefully be close to a wash.

What I focus on is flexibility. So if returns are negative by, say, 3-5% over 5-10 years... Can we adjust our spending to compensate. I know many calculators just assume you keep drawing ignoring market changes but I know a 20% drop will impact my behavior and if I know I can adjust in advance it helps me sleep at night .

Sent from my HTC One_M8 using Early Retirement Forum mobile app

[DEC-1982]

Quote:

Originally Posted by Danmar That's close, but as we all know it's the big loss years that are the issue. If we always get positive results pretty easy to plan?

I should state clearly that this is just a projection. I am not smart enough to come up with a likely scenario of expected returns, so I am using software from a respectable financial company, Fidelity. Even at that, I fully understand that this is a guess.

If you look at post#15, you will see that the one year numbers are not all positive. 2016 is negative and 2017 is near 0%. Note that these are not inflation adjusted. In real terms, both years have negative returns.

Now you could ask, why doesn't the software assume -20% (stock/bond/cash) for 2016 or 2017? I couldn't tell you.

Quote:

Originally Posted by Danmar Doesn't sound like you are retired yet? I can certainly understand why you would forecast results during the accumulation phase. But why would you do it once retired?

I retired recently, and it will take a few years to be more comfortable.

Consider a scenario where every year (2016-2020) has negative nominal returns. New projections in 2020 might show results quite different from what they show today. In the early years of retirement, it makes sense to keep an eye on our situation.

[kcowan]

Quote:

Originally Posted by DEC-1982 I retired recently, and it will take a few years to be more comfortable..

Yes. In my case it was 3 years before I got confident in our survival regardless.

[Symbiotic]

I use 8% nominal, 2% inflation for equities. 100% equities. I am comfortable with what a standard deviation is.

[racy]

I've collected some forecasts made in the past several years:
* 2012 - J. Bogle - 7% stocks, 3% bonds, nominal, for the next decade.
* 2014 - Vanguard - a 60/40 portfolio will return 3.1%-5.2% real over next decade.
* 2015 - J. Bogle - 4% stocks, 3% bonds, nominal, for next decade.

For our 50/50 portfolio I'm using 2.5% real (understanding the fallacy in this!).

[mathjak107]

because of sequence risk anything less then a 2% real return average over the first 15 years of a 30 year retirement stands a very high chance of failing at 4%. that is what caused all our worst case scenario's .

so odds are 0% will not support a 4% inflation adjusted return , you would have to draw less if 10 or 12 years in to retirement you were at zero . . .