obgyn65
Thinks s/he gets paid by the post
I think I already posted on this topic a couple of months ago. Right now my spreadsheet uses about 1% inflation rate, and the return on investment is about 2.5% a year.
What are Your Assumed Rates of Return?
- Thread starter Tekward
- Start date
+1, except that I'm using 3¼ - 3½% inflation rate.
If I could get an average real rate of return above 1%, I would be sooo happy.
Tyro
My original plan (1989... before the on-line calculators, and without a financial adviser) was to validate retirement security. I worked out the plan on many dozens of those extra large green spreadsheets, to include buying houses, cars, moving, etc... and different rates of return. Each calculation ended with a year end net worth determination. The final assumption at the time, was 5% income and 3% inflation, and that was the basis for the final plan.
Absolutely nothing worked out as I had expected in the short term, but... due to other factors... house sale profit, higher or lower returns, and planned expenses... Despite these variations... twenty three years later, that net worth line is within $10,000 of the original plan. (to the good)
I haven't checked the inflation/ROI, but at this point, it doesn't matter. Of course, we are aware of our plan, and check the NW regularly... so this has to factor in, on our decisions on major $$$ commitments.
The plan was to die at age 84, but last check, it looks like we're safe 'til 92.
Absolutely nothing worked out as I had expected in the short term, but... due to other factors... house sale profit, higher or lower returns, and planned expenses... Despite these variations... twenty three years later, that net worth line is within $10,000 of the original plan. (to the good)
I haven't checked the inflation/ROI, but at this point, it doesn't matter. Of course, we are aware of our plan, and check the NW regularly... so this has to factor in, on our decisions on major $$$ commitments.
The plan was to die at age 84, but last check, it looks like we're safe 'til 92.
walkinwood
Thinks s/he gets paid by the post
The sequence of returns has such a great effect on your portfolio performance that average returns mean little. It makes for great spreadsheets, but don't base your plans on it. SWR methodologies are more relevant, but obviously not perfect.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
While I agree with the first part, if you have a cash cushion as part of your AA and/or some reasonable flexibility in tightening your belt with respect to living expenses/withdrawals, particularly in the first few years of living on your portfolio, I think the risk of sequence of returns is managable.
OTOH, if you are so close to the edge that you critically need every dollar of withdrawals to put food on the table and a roof over your head, then I agree sequence of returns becomes more of a risk.
That said, I think average returns are still useful and the risk of sequence of returns can be addressed by some supplemental stochastic testing (Monte Carlo analysis).
LeavingOhio
Recycles dryer sheets
This is an interesting thread. Two things come to mind for me when reading some of the responses:
1) I think people get too bogged down by "real returns". Maybe not any of you who have posted in this thread, but I've talked about this before with friends, and SOME of them look at "real returns" and decide not to invest at all because of it. If you manage to retire with no debt including a paid for house, you can live on much less than you did while working and paying for such things (cars, homes, student loans, etc.). More than likely you'll pay less tax as a percentage of your income, so that helps too. If you have Social Security coming in and investments that earn 2% or more "real return" then as long as you're not in debt, that's a pretty doable situation (assuming you have a decent investment pool to take from).
2) Even when considering "real returns", the expectations seem a bit low. I know I'm a bit younger than some of you, but I've been investing since 1989, and my annual return average since then is just over 11%...I count reinvested dividends in that but not any contributions. I DO probably have more stocks as a percentage of my portfolio than those of you who are retired or closer to it than I am (I'm at 13% bonds and have been for 11 years; since I was 35). I don't invest in risky things (mutual funds only), and I pretty much never change things around. When I feel like more diversification, I'll simply buy another mutual fund rather than switch out of one and into that one.
Over time, I'll go with an inflation rate of 3.5% and lower my returns to 11% annually for a 7.5% real rate of return expectation. If inflation ever gets crazy like it did in the late 70s/early 80s, then rates on CDs and other short-term investments will go up, so if that happens, I might buy some CDs then. Used to be you could get CDs at 12% return.
I still plan to withdraw much less than I can in the first few years of retirement just to help grow my investments even more, but I think 7-7.5% expectation is not out of the realm of possibility. I may change that later if I decide to go with a much higher percentage of bonds in retirement, but for now I don't see getting much beyond 25% bonds. Lots of things could make me change my mind on that though...an unforeseen inheritance, a better-than expected stock market between now and 14 years from now when I plan to retire, etc.
1) I think people get too bogged down by "real returns". Maybe not any of you who have posted in this thread, but I've talked about this before with friends, and SOME of them look at "real returns" and decide not to invest at all because of it. If you manage to retire with no debt including a paid for house, you can live on much less than you did while working and paying for such things (cars, homes, student loans, etc.). More than likely you'll pay less tax as a percentage of your income, so that helps too. If you have Social Security coming in and investments that earn 2% or more "real return" then as long as you're not in debt, that's a pretty doable situation (assuming you have a decent investment pool to take from).
2) Even when considering "real returns", the expectations seem a bit low. I know I'm a bit younger than some of you, but I've been investing since 1989, and my annual return average since then is just over 11%...I count reinvested dividends in that but not any contributions. I DO probably have more stocks as a percentage of my portfolio than those of you who are retired or closer to it than I am (I'm at 13% bonds and have been for 11 years; since I was 35). I don't invest in risky things (mutual funds only), and I pretty much never change things around. When I feel like more diversification, I'll simply buy another mutual fund rather than switch out of one and into that one.
Over time, I'll go with an inflation rate of 3.5% and lower my returns to 11% annually for a 7.5% real rate of return expectation. If inflation ever gets crazy like it did in the late 70s/early 80s, then rates on CDs and other short-term investments will go up, so if that happens, I might buy some CDs then. Used to be you could get CDs at 12% return.
I still plan to withdraw much less than I can in the first few years of retirement just to help grow my investments even more, but I think 7-7.5% expectation is not out of the realm of possibility. I may change that later if I decide to go with a much higher percentage of bonds in retirement, but for now I don't see getting much beyond 25% bonds. Lots of things could make me change my mind on that though...an unforeseen inheritance, a better-than expected stock market between now and 14 years from now when I plan to retire, etc.
If you are accumulating then I don't believe the sequence of returns matters at all. (try taking $1,000, losing 50% in year 1 followed by 5% gains the next 4 years - you will get the same result if you start with 4 years of 5% gains followed by a 50% loss).
However, as you point out the sequence of returns can have an enormous effect in the withdrawal stage. Like pb4, I keep a large cash component to smooth out the down years in the withdrawal phase.
PS
I don't have an assumed rate.
traineeinvestor
Thinks s/he gets paid by the post
I don't know what either the general inflation rate or my personal inflation rate will be in the years ahead but I do expect it to be a positive number most of the time.
With most of my money in risk assets (real estate and equities), my very crude assumption is that over the long term net cash flows will more or less compensate for inflation implying a zero real return. (Obviously, there will be fluctuations over shorter time periods.) Anything above that is a bonus.
For the few years worth of expenses held in bonds and cash, I assume a negative real rate of return.
With most of my money in risk assets (real estate and equities), my very crude assumption is that over the long term net cash flows will more or less compensate for inflation implying a zero real return. (Obviously, there will be fluctuations over shorter time periods.) Anything above that is a bonus.
For the few years worth of expenses held in bonds and cash, I assume a negative real rate of return.
Moscyn
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Well put and exactly my sentiments. I don't have an assumed rate. I figured that it should be quite some time before I am in the withdrawal stage and as long as my monies are not idle and I am still accumulating some, I'll take whatever safe return it can bring. If I have to name a number, then - at least 1% return - as you can see, not aggressive at all.
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Don't know what to expect. Just try to protect oursleves against the big one. Since 3/09 bottom, assets up 13%/yr. Over last eight years, up 6%/yr. There is some added savings in that, but it's small potatoes vs. previous accumulations. Up 4% APR over six months of retirement w/o SS yet and with some significant house improvement spending & vacations.
Cut-Throat
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No.......If inflation runs 3%, the "Benjamins" in the mattress are giving a return of -3% real annually. To get a -1% of real return your investment portfolio would have to return 2% nominal annually.
I think this thread started out rates of return. It did not say rates of real return.
Cut-Throat
Thinks s/he gets paid by the post
The Original Poster mentioned keeping up with inflation would be a zero rate of return....That's a Real Rate of Return.
To ignore inflation, is foolish.
Larry Swedroe writes about future expected stock returns:
Projections show smaller future stock returns - CBS News
On the bright side, he believes expected returns on foreign developed market stocks are quite a bit higher (at least 1% higher and maybe more). This is not mentioned in this particular article, however.
Projections show smaller future stock returns - CBS News
On the bright side, he believes expected returns on foreign developed market stocks are quite a bit higher (at least 1% higher and maybe more). This is not mentioned in this particular article, however.
Midpack
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Another source of future expected returns, real, nominal & inflation. I review Ferri's projections whenever he updates, but it's just another data point, albeit a good one IMO. Table summary near the end of The Portfolio Solutions 30-Year Market Forecast for 2012 « « Portfolio Solutions Portfolio Solutions
Corporateburnout
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This link was referenced by the OP earlier in the thread.
audreyh1
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
It's tough to know what will happen. Thanks for the links to various projections. I have aprox 50/50 allocation (53/47). My bonds include plenty of corporate and some emerging markets, so I hope those will at least keep up in real terms. I have a pretty well diversified equity allocation (large, med, small, foreign, REITs). If my portfolio can achieve 2% real return, I think I'll be more than fine. Fingers crossed!!!!
truenorth418
Full time employment: Posting here.
The responses on this thread are interesting in light of historical returns. I am reading Jeremy Siegel's Stocks for the Long Run. He includes a table showing stock market returns over various periods. Over extended periods of time we have seen consistently a total real rate of return (after inflation) of about 6.8% annually. Of course, returns fluctuate significantly during shorter periods.
1802-2005 6.8
1871-2006 6.7
1946-2006 6.9
1982-1999 13.6
1966-1981 -0.4
1802-2005 6.8
1871-2006 6.7
1946-2006 6.9
1982-1999 13.6
1966-1981 -0.4
I have been thinking about rates of return going forward alot lately. I was offered an early buyout of my pension recently. I am 56 and plan to start taking my pension at 65. I would have to get 8% return average for the next 9 years to purchase an annuity that equals the monthly payout of my former employer. The lump sum was lowball at best.
I decided to leave that risk on them. I am expecting somewhere around 4% return average going forward.
I decided to leave that risk on them. I am expecting somewhere around 4% return average going forward.
Bimmerbill
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I use 2% real. But I also run Firecalc with 0 real and also 5-8 just to see.
JustCurious
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This is consistent with Vanguard's Model Portfolio of 100% stocks, which has averaged 9.9% per year over the last 85 years since 1926 (including the great depression and the 2000 tech bubble and the 2008 great recession). A 9.9% nominal return with 3.2% inflation is a 6.7% real return.
https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
Despite the data, some people are conservative by nature, and will always err on the side of conservative estimates. Also, people feel more comfortable making conservative predictions like "I know that stocks have returned 10% historically, but I am planning for 5% just to be safe" instead of "I am planning for at least 10% per year, maybe more." There is a perception on this board that the former prediction is accepted, while the latter will be criticized as too optimistic, regardless of whether it is supported by data.
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rescueme
Thinks s/he gets paid by the post
My personal inflation rate is much less than I promised DW on our honeymoon ...
Just to add some humor to a very depressing thread...
Seriously, if our joint portfolio (with a very large cash stash) retuned 2% over inflation (as it has over the last five years of retirement), we're happy...
...Just to add some humor to a very depressing thread...
Seriously, if our joint portfolio (with a very large cash stash) retuned 2% over inflation (as it has over the last five years of retirement), we're happy...
boatfishandnature
Recycles dryer sheets
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I use Inflation plus 3.5% for my planned withdraw rate for a portfolio of 60% US and European stocks, 15% US$-based bonds and 25% Brazilian Real-based bonds (the latter indexed to inflation).
all i can say is this.after the go go 90's were for 3-4 years i was making 30 percent per year(and thought i would be rich) in the last 12 years i find i have made a total of 10 percent total-less than 1 percent a year.
the 2008 crash cost me about 50 percent of my money.i did not sell and it has come back to slightly over what i had 10 years ago.
these historical averages are just that. i do not believe that you can assume they will work in the future.
the 2008 crash cost me about 50 percent of my money.i did not sell and it has come back to slightly over what i had 10 years ago.
these historical averages are just that. i do not believe that you can assume they will work in the future.
Inflation Adjustment
I appreciate all the comments. The diversity of thought is interesting.
I've made some adjustments (current model: my funds run out when I turn 92 if I start next year at 55). My current spreadsheet assumes:
Withdrawl (~50% of current income) - increases inflation +1%
Pensions (Navy & SS at appropriate times) - decreases by inflation -2%
Savings return - equal to inflation
Since inflation is common across the row I cancel it out. For example, I'm assuming that if inflation is 10% for a year my income (savings return & pensions) would increase by 10% and my costs (funds needed to withdraw) would also increase by 10% so it cancels. Thoughts?
I appreciate all the comments. The diversity of thought is interesting.
I've made some adjustments (current model: my funds run out when I turn 92 if I start next year at 55). My current spreadsheet assumes:
Withdrawl (~50% of current income) - increases inflation +1%
Pensions (Navy & SS at appropriate times) - decreases by inflation -2%
Savings return - equal to inflation
Since inflation is common across the row I cancel it out. For example, I'm assuming that if inflation is 10% for a year my income (savings return & pensions) would increase by 10% and my costs (funds needed to withdraw) would also increase by 10% so it cancels. Thoughts?
