What Investment Rate of Return do you Use?

[Golden sunsets]

For those of you spreadsheet nerds who project Investment Returns over future years when comparing Available Funds Versus anticipated expenses, I'd like to get a sense of opinions on what rates you assume. I had been assuming 8% for our Tax Deferred and 4% for our After Tax investments. Our portfolio is a relatively typical AA (55/35/10). My assumptions average out to a Total Return of 6.67% and do include inflation. I've known for some time that I was probably being too aggressive. I'm playing around with different scenarios. I realize AA affects returns, but before I settle on new assumptions, I'd love to hear what rates, you all use. Thanks in advance for sharing.

 

[braumeister]

I'm a conservative sort, so I've always projected 1% real return (i.e., 1% higher than inflation).

 

[GravitySucks]

I don't care much for spreadsheets for planning since I found RIP and FireCalc, but I do still play with the old one now and then.

I use -1% real return for first 5 years then 2% for the remaining on the pessimistic side, and a straight 6% for the optimistic scenario. Of course these are just WAG and mean nothing.


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[Totoro]

Equities 6.5%
Bonds, cash & CDs: whatever yield it is currently invested at. Blended i'm roughly at 2% right now.
Inflation: 2% (eurozone)

Above is gross, so before any tax or expenses.

 

[nun]

There's a lot of wishful thinking when it comes to return. People with a lot of savings use low returns because they can and still meet their income goals and people saving just a little often use optimistic returns to make themselves feel better.

Personally I use real returns (ie after inflation) of 4% for stocks and 0% for bonds (I use 2% inflation).

 

[youbet]

Using "average" rate of return and inflation rate guesstimates is pretty useless, even dangerous, unless variation is also considered. You really shouldn't ignore the sequence of return factor.

When playing with spreadsheets for yuks, I generally construct models where the long term average rates of return and inflation are my guess but where they vary from year to year. To make the tests conservative, I'll load high inflation and low returns into the early years. Then I reverse those for the later years in order to have an approximation of the average I'm guessing.

The results are very different (and more realistic and conservation IMHO) that making the assumption that the average return and inflation numbers will occur every year with zero variation.

I like the FireCalc methodology of using actual historical data to test scenarios.

 

[Whisper66]

I use 5% for total portfolio return (I'm around 85% stocks, rest bonds / cash) and 2% inflation. This seems reasonably conservative for a longer term analysis to me.

 

[youbet]

I don't care much for spreadsheets for planning since I found RIP and FireCalc, but I do still play with the old one now and then.

I use -1% real return for first 5 years then 2% for the remaining on the pessimistic side, and a straight 6% for the optimistic scenario. Of course these are just WAG and mean nothing.


Sent from my iPad using Early Retirement Forum

+1

Yep. Spreadsheets using constant rates of return and inflation can be fun to play with but they're a poor (too optimistic) testing tool unless you go to the trouble of including year to year variation (resulting in the same average).

 

[RockyMtn]

I use 3% inflation. Return of 3% (or 0% after inflation) on tax deferred which is 100% bonds. Use 6% on after tax accounts (or 3% after inflation) with an AA in those accounts of 65/25/10.

 

[523HRR]

1% real return (4% nominal, 3% inflation)

 

[Meadbh]

Using "average" rate of return and inflation rate guesstimates is pretty useless, even dangerous, unless variation is also considered. You really shouldn't ignore the sequence of return factor.

When playing with spreadsheets for yuks, I generally construct models where the long term average rates of return and inflation are my guess but where they vary from year to year. To make the tests conservative, I'll load high inflation and low returns into the early years. Then I reverse those for the later years in order to have an approximation of the average I'm guessing.

The results are very different (and more realistic and conservation IMHO) that making the assumption that the average return and inflation numbers will occur every year with zero variation.

I like the FireCalc methodology of using actual historical data to test scenarios.

I do that too.

 

[W2R]

Before I retired, I used to do projections with various investment rates of return. Often I used 5% and assumed 3% inflation, but also tried various other rates.

But now that I am in my 7th year of retirement, I don't do any of that any more. My financial situation has turned out to be just fine with the market thriving as it has. Plus now I have SS and basically everything is coming up roses.

Now, if hyperinflation should occur I might be back to doing projections. But, so far so good.

 

[youbet]

Now, if hyperinflation should occur I might be back to doing projections. But, so far so good.

I wonder what you mean by hyperinflation as opposed to plain old high inflation?

Personally, I never bother with models involving hyperinflation. If we get to that stage (CPI doubling or more every year for example), I figure all the rules are out.

But I have done a few models where I assumed a long term average rate of inflation of 3% but where the first few years had inflation levels of 10% to 15% (high but not hyper). I offset these with years of very low inflation at the end so the average was approximately 3%. My results were much less favorable than if I used a constant 3% over the entire period.

With a "hyperinflation" assumption, I generally assume cash or near-cash becomes worthless and you just have to take a guess on what investment categories keep up with or beat inflation. That is, if CPI doubles year over year (hyperinflation), what investment categories might likely also double or better? Precious metals and stones? Land? Dunno.........

 

[Golden sunsets]

Before I retired, I used to do projections with various investment rates of return. Often I used 5% and assumed 3% inflation, but also tried various other rates.

Was your 5% including inflation or nominal?

 

[DEC-1982]

I don't make my own assumptions, I just use whatever FIDO RIP uses in its Income and Expense Details.

Growth Rate=((Next year's assets-(This Year's Assets-This Year's Withdrawals))*100)/(This Year's Assets)

These were the numbers I came up with. It's pretty ugly, which is probably what FIDO RIP wants for the first 10 years. I am still using the old RIP.

2016 -7.34%
2017 0.03%
2018 4.32%
2019 2.81%
2020 5.28%
2021 1.92%
2022 6.40%
2023 5.31%
2024 6.81%
2025 8.03%

Perhaps the denominator should have been (This Year's Assets-This Year's Withdrawals), because if I do my asset adjustments on Jan 2 of "this year", the subtracted value really is the basis to grow or shrink.


I haven't taken the trouble to do the calculations beyond the first 10 years.

 

[hnzw_rui]

I use 0-3% real for spreadsheets (accumulation) and I-ORP. Then I model the portfolio balance I get from the spreadsheet with FireCalc and ********.

Don't have access to Fidelity RIP and I'm somewhat hesitant on purchasing ESPlannerPLUS. To those that have purchased ESPlanner, is it worth it?

 

[nun]

You should do your calculations with numbers that are a few standard deviations from the averages you are using. If you still succeed you should be ok

 

[Car-Guy]

For the past ~5 years I've used 3% for return and inflation

 

[jebmke]

The only part that I project is the IRAs. I use 0% real since it is close to the going rates for bonds and it makes estimating RMDs easy.

 

[BBQ-Nut]

I used a range of real returns to bracket scenarios in my spreadsheet, but I will say I used a real return of 1% as my most typical. Then that was thrown into the pot with other 'pro' calculators, such as the Fido RIP.

 

[Willers]

On the one spreadsheet I use (and i-orp), I use 1.5% real. As has been mentioned, the spreadsheet is probably worthless, but it was a good starting point at the time to know if I was even in the ballpark. I didn't know about FireCalc, ******** and others at the time.

To show you how inaccurate predictions can be: on a sheet I did in Quicken in 1993 (they only had a simple calculator then), I assumed 7% real. How things have changed...

 

[W2R]

Before I retired, I used to do projections with various investment rates of return. Often I used 5% and assumed 3% inflation, but also tried various other rates.

But now that I am in my 7th year of retirement, I don't do any of that any more. My financial situation has turned out to be just fine with the market thriving as it has. Plus now I have SS and basically everything is coming up roses.

Now, if hyperinflation should occur I might be back to doing projections. But, so far so good.

Was your 5% including inflation or nominal?

5% nominal, 2% real

I wonder what you mean by hyperinflation as opposed to plain old high inflation?

Above I wrote, "Now, if hyperinflation should occur I might be back to doing projections." I probably should have added, "Now, if plain old high inflation should occur I might be back to doing projections." But what is "plain old high inflation", and what is not? Maybe the question really is, "W2R, where do you draw the line? By what criterion will you decide to do further projections?"

Now that I am retired, I have little motivation to run further projections unless/until I feel that conditions are such that my retirement could possibly be in jeopardy unless I ramp up the LBYM markedly. For example, if inflation (~~>> spending) rises significantly faster than yield (~~>> income), I might decide to drop everything and start diving into the numbers again.

At the moment, given this year's CPI, and yield that is providing me with more than adequate income, I do not feel especially impelled to work on this problem although it is an interesting one.

In the future? Who knows. Maybe I'll just take it as it comes.

 

[jkern]

I've projected the next 4 years using 2%, 3% and 4% Rates of return. Just trying to guess what I might have when I start SS.

 

[zesty]

I use 2% real for stocks and 0.5% for bonds for any point in the future.

 

[Independent]

1% real return.

Maybe 3% inflation and 4% nominal return.