What Real Return Are You Planning On?

[Midpack]

Real return being actual returns minus inflation? For example, if you expect 10% portfolio returns and 3% inflation, you're projecting a real return of 7%.

 

[stevelb]

About 2 1/2%

 

[Danmar]

Don't have to actually plan this do we? Doesn't Firecalc simply use historical results?

 

[John Galt III]

I clicked on 2 to 4 %. Expecting 2 to 4 % each year, which would end up being more than 2 to 4 %, after 30 years, due to compounding. Hoping for much more than 2 to 4 % after 30 years.

 

[RonBoyd]

I am partial to the way Stein and DeMuth put it:

People are forever bragging about their investment returns. Never mind all the cases where they're conveniently forgetting to mention all their losses, are just plain wrong, or are outright lying. This talk is meaningless unless you know how much risk they took to get the returns they brag about. The guy at the next locker whose portfolio was up 15 percent last year while yours was up only 7 percent? He may not know it, but for the chance he was taking, he should have been up 30 percent. Knowing returns without understanding risks is like knowing only one team's score in a football game.

Yes, You Can Supercharge Your Portfolio, Page 15.

They go on with: "If it were simple to take a very small amount of risk and capture a big reward, everyone would do it and we would all be rich."

 

[W2R]

Some say we should expect 8% returns from the stock market, but with an asset allocation of 55% bonds, I am thinking that around 6% might be a better estimate of long term returns for my total portfolio.

Subtracting 3.0%-3.5% inflation, that would give me (ouch!) roughly 2.5%-3% real return.

I am not entirely sure that past market performance is any indication of what we might expect in the future. I just don't know. So maybe this is too optimistic. Or, maybe it is too pessimistic. As the years go by, we will see. To me this uncertainty is one reason why it is advisable to have a comfortable margin over and above what we will need in retirement, before pulling the plug.

 

[ziggy29]

Don't have to actually plan this do we? Doesn't Firecalc simply use historical results?

Yes, but it also requires faith that the future will be like the past, which a lot of people are increasingly uneasy about assuming.

I expect about a 4% real return from stocks and maybe 1% from a bond fund, so my current target 60/40 allocation would put me at 2.8%.

 

[tuixiu]

I usually throw around a 6% (3% real) when playing fantasy retirement simulations.

 

[SecondCor521]

Huh.

My "assumptions" policy is to find the longest-term, most-recent, most-applicable assumptions I can find for the ~26 variables in my model.

For inflation, I assume 3%. I believe this is the long-term average in the US going back to at least WWII. I believe the WSJ has been reporting around 2% core inflation over the last year. My personal rate has been negative over the past several years, but that is due to cost-cutting measures I've been able to put into play.

For investment returns, I assume 10.7%. I believe this is the Ibbotson-reported rate going back to 1928. I've been invested 100% stocks in the S&P for a long time, so my return over the past year or so has been better than 10.7% -- it should be more like 70% or so.

In my short (~20 years) of watching the world and my rates of return, I've seen a lot of what I could call "emphasis on the present" -- the world was nearly going to end during the TARP timeline, and during the crash in 87, and the Asian meltdown, and the Y2K disaster, and the first Iraq war. The world was going to be all flowers and sunshine during the tech bubble, and the housing bubble. I don't buy the "this time it's different" argument either on the upside or the downside, although I do look for historical signals that it might be. Haven't seen anything yet that makes me think that "this time" is going to be much different than the last time. And we have bumbled our way through.

That having been said, using those trend numbers and the other 24 dials, I keep coming up with between 45 and 48 to be FI. And I have more and more flexibility each day with things I can do to keep myself on that track. So unless we do start WWIII, or have Weimar Republic-level inflation, I think I'm going to be OK.

2Cor521

 

[JBmadera]

based on my AA, adjusted for inflation, I'm expecting just a tad over 4%....hoping for more of course but as my investment buddies are always reminding me "hope is not a strategy".

 

[Meadbh]

I voted 2.1-4%. Nominal returns could be anything from negative to some double digit number, but on average, equities might be expected to return 7% and fixed income substantially less. Let's say a balanced portfolio has an (average) weighted absolute return of 5% over the next 30 years. Subtract 2-3% for (average) inflation and you end up with 2-3%. Of course if a period of hyperinflation correlates with a period of negative returns, one is screwed. But if real returns remain positive, one should be ahead of the game.

 

[ESRwannabe]

I expect that my real return will be around 6% to 8% on average per year. My AA is around 90/10 now. I am invested globally, pretty close to market cap and country weightings. I'm about 70% indexed and 30% active funds and individual stocks.

As long as I can get at least 3% real return I'll be happy. That's about all I plan to withdraw each year once I have enough to semi-retire.

 

[bbbamI]

As long as I can get at least 3% real return I'll be happy.

That's the way I feel as well. DH and I are both retired and our WR is 3%. We could take more, but there is not a need.

 

[IndependentlyPoor]

Hoping for 3% real, but making sure we could still get by on 2% real.

 

[Alan]

Don't have to actually plan this do we? Doesn't Firecalc simply use historical results?

I agree.

Similar with Fido Income Planner - it assumes an inflation rate (or you can enter an inflation rate?). I've not looked at what the return (real or otherwise) needs to be. (Fido uses Monte Carlo simulations)

Since I'm going with a 3% SWR I guess I'm hoping for a real return of at least 3%.

 

[traineeinvestor]

My rather simplistic assumption is to expect that the net-of-everything yield on my real estate and equities will be a realistic proxy for real return on the assumption that the value of the underlying assets more or less matches inflation over the longer term. The net yield is currently around 3% so I am assuming a 3% real rate of return.

Of course, history suggests that there can be prolongued periods when the underlying assumption is not true and the underlying assets either outperform or underperform against inflation so I am open to better ideas.

As a side note on inflation, I am wary of assuming that the CPI rate can be used as a proxy for my personal rate of inflation.

 

[haha]

I don't even understand this question. What return you expect has nothing whatsoever to do with what return you might get, unless you are some kind of trader and you have good reason to expect certain results. Over a relatively short time bubbles or crashes can temporarily change that for better or worse, since if youk have the skill to sell when there is overvaluation youk will do better. But if you don't give credence to valuation, how would that even be possible?

For the rest of us the expected mean retun is baked in when we make the investment, subject to a little minor jiggering when we rebalance. It's in interest rates and stock valuations. As long as we don't go out very far, at least the fixed rate bet has a time limit based on it's duration.

Ha

 

[DivinDave]

I see almost half the respondents said 2.1 to 4 percent. I wish that was divided even finer. It would be interesting to see.

 

[plex]

4.5%, I intend to extreme ER, so will have the ability to have a higher equity ratio than normal. I am thinking of something like 70/20/10 during retirement, unless we are at an extreme high or low.

 

[meierlde]

To find the real return on the S&P 500 for any series of years since 1871 here is a sitehttp://www.moneychimp.com/features/market_cagr.htm
From 1970 to 2009 the real return is about 5%. while the 1871 to 2009 real return is 6.68% This is sort of the basis on which Firecalc works and you can thus see the return numbers for any series of years. Note just for grins if you started on Jan 1 1926 and went to Dec 31 1932 you get a return of .04% but thats probably about the worst case. The issue is the short term versus long term focus involved and suggests the common theme here of not having to access non bond/cd investments for several years in the event of a downturn.

 

[RonBoyd]

Maybe this will help:

Chances Are - Opinionator Blog - NYTimes.com

Before going on vacation for a week, you ask your spacey friend to water your ailing plant. Without water, the plant has a 90 percent chance of dying. Even with proper watering, it has a 20 percent chance of dying. And the probability that your friend will forget to water it is 30 percent. (a) What’s the chance that your plant will survive the week? (b) If it’s dead when you return, what’s the chance that your friend forgot to water it? (c) If your friend forgot to water it, what’s the chance it’ll be dead when you return?

Although they sound alike, (b) and (c) are not the same. In fact, the problem tells us that the answer to (c) is 90 percent. But how do you combine all the probabilities to get the answer to (b)? Or (a)?

“[He] was visibly nervous while trying to figure out what he would tell the woman. After mulling the numbers over, he finally estimated the woman’s probability of having breast cancer, given that she has a positive mammogram, to be 90 percent. Nervously, he added, ‘Oh, what nonsense. I can’t do this. You should test my daughter; she is studying medicine.’ He knew that his estimate was wrong, but he did not know how to reason better. Despite the fact that he had spent 10 minutes wringing his mind for an answer, he could not figure out how to draw a sound inference from the probabilities.”

 

[rescueme]

I have no idea and never planned on a certain return (real versus nominal value).

However, plugging my/DW's actual holdings into the M* Asset Allocator tool, it shows an expected 6.76% return long term, with a possible three month loss of 10.94%.

The tool gives you the real rate of return, adjusted for a 2.5% annual inflation rate.

Does it work? Have no idea (I'll let you know in 30 years, when I'm 92 )...

 

[Nords]

Running over time in one-week increments, this poll would make a great market-sentiment indicator.

As well as a great market-timer warning...

 

[DblDoc]

I use these for WAG purposes:

The Portfolio Solutions 30-Year Market Forecast: Low cost investment manager, Portfolio Solutions

DD

 

[clifp]

I see almost half the respondents said 2.1 to 4 percent. I wish that was divided even finer. It would be interesting to see.

Ya I actually did the math and it was real close between the 2.6-4% and the 4.1%+ category.

75% equity (8% -3% inflation)=3.75%
25% fixed (4.5- 3% inflation) = .375%
So a 4.125% can you say right on the dividing line.