What is a reasonable rate of return?

[RDamien]

I realize this is very subjective but I'm trying to get an idea of where I'll be and I'm not sure what numbers are safe to plug in to investment calculators.

Generally speaking over say a 20 year period investing in a 401k mutual fund, the 5 and 10 year returns on the funds I'm in are in the 10-12% range. I'm giving myself 7% for the 20 years, which I'm thinking (hoping!) is conservative. Fair?

I'm 37 right now, investing 15% per year into my company 401k and have been doing so for the past 8 years or so. I'm looking to kick things up after discovering this site and I have about 150k in the mutual funds plus a couple of hundred thousand equity on our home. My wife is in much better shape at 35 years old with about 400k invested (love you, babe ) and I'm trying to pull my weight here.

 

[d]

for what it's worth, i've been using 7.5% in my planning ...

 

[tgotch]

What is your AA (Asset Allocation)?

 

[kcowan]

I would say that 7% is pretty reasonable for 100% equities. I use 8% but then I also have microcaps in my portfolio.

 

[retire@40]

I'm hoping to get at least an annual 7% average long-term rate of return to make my plan work.

It's tempting to estimate higher since I've been doing better than that over the past 10 to 15 years, but I would rather err on the conservative side.

I would sign on the dotted line for a guaranteed 8% annual rate of return.

 

[Lsbcal]

As a first cut you might use the following Vanguard data based on your AA: https://personal.vanguard.com/us/planningeducation/general/PEdGPCreateTheRightMixContent.jsp

 

[rs0460a]

I used 6% when I did pre-retirement projections many years ago.

It served me well. Going forward (I'm retired) I feel more comfortable with my "lowered expectations"...

- Ron

 

[Marquette]

I'm using a 2% real rate of return in my planning. 80/20 with an international and value tilt.

Edit: For example, if my personal inflation rate is at 5% then I need 7%.

 

[Marquette]

My wife is in much better shape at 35 years old with about 400k invested (love you, babe ) and I'm trying to pull my weight here.

Get her some flowers, help out with the laundry, put the toilet seat down, and thank her for managing her money so well.

 

[RDamien]

What is your AA (Asset Allocation)?

You know I'm embarrassed to say I cant give a comprehensive answer to that. Looking at it now I have 10% in Bonds, 23% Money Market / Stable Value, and 67% Stocks. I'm set to speak to a financial planner to help me decide how to re-allocate that though. I'm looking at one of those "lifestyle" funds I believe they're called. T Rowe Price Retirement 2030 fund.

retire@40: I'm with you. I'd sign up for 8% myself right now and I'd rather estimate on the low side.

 

[RDamien]

Get her some flowers, help out with the laundry, put the toilet seat down, and thank her for managing her money so well.

Ha! I would but I think she'd get suspicious

But yeah for real, I'm a lucky guy.

 

[Marquette]

You know I'm embarrassed to say I cant give a comprehensive answer to that. Looking at it now I have 10% in Bonds, 23% Money Market / Stable Value, and 67% Stocks. I'm set to speak to a financial planner to help me decide how to re-allocate that though. I'm looking at one of those "lifestyle" funds I believe they're called. T Rowe Price Retirement 2030 fund.

retire@40: I'm with you. I'd sign up for 8% myself right now and I'd rather estimate on the low side.

I'm not going to tell you to not get an FA.. but I would encourage you to pick up some books on investing as well. Someone else will come along wit a comprehensive list, but I can say that I found it helpful to start with Boglehead's Guide to Investing.

That fund you're looking at is a target retirement fund (I'm guessing, from the name). A lifestyle fund will have something like lifestyle in the name. For example: Vanguard LifeStrategy Moderate Growth Fund https://personal.vanguard.com/us/funds/snapshot?FundId=0914&FundIntExt=INT

 

[jIMOh]

I am close to 100% equity and plan to get 9% returns in tax advantaged accounts and 7% in taxable accounts.

I think getting 8% in each is a possible outcome. I think 7% is too low for anything with 75% equities or more. A 60-40 asset allocation can get 7% returns with much less risk than 100% equities. So if you are thinking 7% is where you want to be, I suggest ratcheting down the risk. If you want to take on more risk, you should expect (and plan) for a higher return.

 

[Midpack]

I am using Rick Ferri's 30 year forecast for my long range planning, estimates returns by asset class so you can apply it to your specific AA. It works out to about 2.5% less than my AA has historically returned. May seem conservative by historical standards, but I consider it more realistic for what lies ahead. And if it's wrong, my downside is I'll have excess $, I can live with that. If this link works http://www.portfoliosolutions.com/v2/pdf/Portfolio Solutions - 30 Year Market Forecast.pdf. Good luck, there is no right answer as you know...

 

[statsman]

I am using Rick Ferri's 30 year forecast for my long range planning, estimates returns by asset class so you can apply it to your specific AA. It works out to about 2.5% less than my AA has historically returned. May seem conservative by historical standards, but I consider it more realistic for what lies ahead. And if it's wrong, my downside is I'll have excess $, I can live with that. If this link works http://www.portfoliosolutions.com/v2/pdf/Portfolio Solutions - 30 Year Market Forecast.pdf. Good luck, there is no right answer as you know...

Using these estimates, which do seem conservative, in order to get 6% you would need roughly 30% stocks and 70% bonds, which is about 20% less than the 7.4% Vanguard historical quotes for this asset allocation. Given that we are shooting for 5+% for the next 6 years leading up to ER, this is very much in our comfort level.

 

[aaronc879]

I think anything over 7% regardless of AA is risky. 6% or 7% is reasonable with 75% or more in equities. I have about 90% in equities and hope for 7%.

 

[RDamien]

I'm not going to tell you to not get an FA.. but I would encourage you to pick up some books on investing as well. Someone else will come along wit a comprehensive list, but I can say that I found it helpful to start with Boglehead's Guide to Investing.

Appreciated. It's a bit overwhelming at first. I have to say I've been hearing numbers like 12% return thrown around and knowing any better I had been thinking 9 or 10% was reasonable.

In any case, I should crack a few books.

 

[W2R]

I'm not going to tell you to not get an FA.. but I would encourage you to pick up some books on investing as well. Someone else will come along wit a comprehensive list, but I can say that I found it helpful to start with Boglehead's Guide to Investing.

Here is a good list of investment books, which I have found helpful:
Investment Books

I have read several on that list, and the Boglehead's Guide to Investing that Marquette refers to is very good.

 

[Moemg]

and the Boglehead's Guide to Investing that Marquette refers to is very good.

Great book and you can get a used like new one on Amazon for a great price !

 

[Dude]

I'm looking at one of those "lifestyle" funds I believe they're called. T Rowe Price Retirement 2030 fund.

I have some of our Roth IRAs in TRP Retirement 2035, I think it's a good plan. Be aware that there are different share classes of these funds, make sure you get into the lowest cost, expense ratio shouldn't be higher than about 0.73% (for TRRCX). I split my Roth funds between TRP 2035 and the lower cost Vanguard TR 2035 to get an overall ER of about 0.35% which I think is reasonable for an overall portfolio. Also puts the bulk of funds in indexes with some active management which makes sense to me. Good luck

 

[Midpack]

I have some of our Roth IRAs in TRP Retirement 2035, I think it's a good plan. Be aware that there are different share classes of these funds, make sure you get into the lowest cost, expense ratio shouldn't be higher than about 0.73% (for TRRCX). I split my Roth funds between TRP 2035 and the lower cost Vanguard TR 2035 to get an overall ER of about 0.35% which I think is reasonable for an overall portfolio. Also puts the bulk of funds in indexes with some active management which makes sense to me. Good luck

What is the advantage in the TRP fund with a 0.74% ER vs the V TR fund with a 0.19% ER?

 

[mahoneycutt]

Be Conservative

Plan your budget around a 5% or 6% return and if you get 8% or even 10% then it is gravy.

However, plan on 8% and 10% and only get 5% and 6% then start cleaning up your resume cause you're going back to work.

Mike Honeycutt

 

[Rich_by_the_Bay]

I agree with a planning assumption of 7-7.5% for the total stock market, and maybe 5% for total bond market. Calculate your overall return based on your AA.

That said, this is pure, conservative speculation based on reading what the more sensible and conservatives gurus (Bogle, Lucia, Ferri, Bernstein, others) have said. But you've got to use some assumption if you're going to do any planning.

 

[d]

Plan your budget around a 5% or 6% return and if you get 8% or even 10% then it is gravy.

However, plan on 8% and 10% and only get 5% and 6% then start cleaning up your resume cause you're going back to work.

Mike Honeycutt

which reminds me of one of my favorite lines:

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

 

[copyright1997reloaded]

Why plan nominal returns?

I agree with a planning assumption of 7-7.5% for the total stock market, and maybe 5% for total bond market. Calculate your overall return based on your AA.

That said, this is pure, conservative speculation based on reading what the more sensible and conservatives gurus (Bogle, Lucia, Ferri, Bernstein, others) have said. But you've got to use some assumption if you're going to do any planning.

Rich, others - can someone explain to me the value of planning asset returns in nominal (not real) terms? What does it matter what your portfolio returns if it doesn't take into account inflation expectations?

For myself, I use asset allocation to hedge risk/lower variance, but pretty much only assume I can have currently accumulated assets grow with inflation (during my growth phase) and roughly a 4% swr during distribution.