What Investment Rate of Return do you Use?

[Spanky]

I used 6% nominal in the past, thinking about changing it to 4% nominal.

 

[audreyh1]

Gave up using rates of return and projections.

We've been retired for 16 years now. If our net worth keeps up with inflation, I'm quite happy.

 

[daylatedollarshort]

We mainly use the Fidelity RIP with the most conservative setting and have a spreadsheet with real returns and inflation as parameters. We usually model with a 0 - 1% real return in the spreadsheet.

 

[zesty]

I think people who assume 20th century (8% real) returns for stocks are going to be sorely disappointed.

 

[Fedup]

I use 2%.


Sent from my iPad using Early Retirement Forum

 

[hnzw_rui]

I think people who assume 20th century (8% real) returns for stocks are going to be sorely disappointed.

Either that or we (with our 0-4% real) will be pleasantly surprised. Oh well, we'll see. Better safe than sorry.

 

[papadad111]

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

Same. 1 percent real return before taxes regardless of AA mix. It's a simple rule of thumb , but thats what I use.

 

[Turn_the_Page]

4% total return for a 50/50 allocation.

 

[eta2020]

I think people who assume 20th century (8% real) returns for stocks are going to be sorely disappointed.

But who did?

S&P 500 Return Calculator - Don't Quit Your Day Job...

2.3 % real returns
7.0 % real returns if Dividends are reinvested.

It is always the same. Nothing changes. So I expect something similar over entire 21st century. I have no idea what it will be over next 10 years.

 

[Golden sunsets]

Thanks to all who shared. I concur that the spreadsheet exercise is largely useless but I continue to revise and project. For me it's a form of entertainment.

 

[kcowan]

I used 6% nominal in the past, thinking about changing it to 4% nominal.

I use 4% and have for 13 years. It projects a positive balance forever (ignoring LTC). I used to use CPI but concluded that it does not reflect our reality.

 

[Midpack]

Retired now but I used 0-2% real returns in my modeling, but I was looking for a conservative result - a likely worst case I could expect barring various black swans. I'd rather have an upside surprise than downside...

 

[jabbahop]

Here is Rick ferri's forecast.

http://www.rickferri.com/blog/investments/portfolio-solutions®-30-year-market-forecast-for-2015/ Hoping he is right but not counting on it.

With social security we are fine with .5%. But would love for it to be higher

 

[NW-Bound]

Gave up using rates of return and projections.

We've been retired for 16 years now. If our net worth keeps up with inflation, I'm quite happy.

Net worth keeping up with inflation after spending makes you happy?

Oh man, there are people who expect more than that?

 

[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.

 

[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]

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]

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]

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]

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]

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]

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]

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?