What Overall Rate of Return do you use in your financial projections

[Arc]

I noticed in another thread that some folks think that it is a little risky to use 7-8% return in financial projections. I've always thought that 7-8% was very conservative in a portfolio with >75% equities - over a 15-20 year time frame. So what overall rate of return do you use?

Apologies if this has been done before.

 

[2B]

It has been tossed around before but one more time doesn't hurt. You can play with the numbers all you want. Pick low returns and high inflation and you'll not be able to retire on 2% of your portfolio. Pick high numbers and you'll be fat, dumb and happy (for awhile) taking 6+%. The closest thing to "reality" is FIRECalc. You then need to sprinkle in your own hopes and fears.

Pick a low return and you may never have enough to retire. Pick a high return and you might have the risk of running out of money or cutting your spending when you're too old to get a j*b. We all have to "buy our ticket and take our chances."

My suggestion is to look at your spending profile as seriously as you consider your anticipated return. When things go well you can take that trip to Europe. When things are tight, a day at the local art museum is all that might be in the cards. Also, at 85 do you really think you'll be wanting to travel as much as you might at 55?

 

[hankster]

I use 7% during the accumulation phase and 5% after retirement. Hopefully these numbers are realistic enough. If we do better, then BONUS. If we do worse, well I guess I'll w*rk a bit longer, travel less or find a part time gig.

Hank

 

[OAG]

I currently use 5.8% dropping to 4.75% in 7 more years; the 5.8% is locked for 7 years (Long term CD's - 7 to 10 years). Assuming a drop to 4.75% after that point. Age in 7 years will be 74; until then 0% withdrawal rate. Been "retired" in excess of 20 years so have a pretty good handle on expenses.

 

[Spanky]

I pick 7% even though a 60/40 mix’s annualized return was 9.6 percent.

 

[megacorp-firee]

I use 5% so I build in another buffer. My expectations are low and my results are usually higher. ... sleeping like a baby

 

[Alan]

When I first started out investing and was planning for retirement I used 10%. This was in 1993 and I was 100% equities. As the years went by and I slowly became more conservative I lowered my expectations. I am now at the AA I expect to maintain through retirement 40/50/10 and use 8% as an expected long term ROI.

 

[youbet]

More important than the absolute level of average returns is the variability and timing. Two people retiring and both receiving an average of 7% returns over the balance of their life can have very different results based on timing.

The new intro page to FireCalc gives a super explanation and example of this.

Projecting your retirement financial results based on average returns is very dangerous........

 

[audreyh1]

I have been calculating my average annual return on my retirement portfolio since I retired in late 1999 for the purposes of future projections. Obviously, we have been through one harsh bear market during that time, but lo and behold it looks like we're already being served another, so maybe it's not too conservative.

pre-tax annual return (compounded) 2000-2007: 6%
after-tax annual return (compounded) 2000-2007: 5.2%

I use this latter number for my projections. Anything higher would be wishful thinking IMO. Realize this is performance of a more conservative post-retirement portfolio. Not THAT conservative, however, as I do hold almost 60% in equities.

Audrey

 

[DblDoc]

More important than the absolute level of average returns is the variability and timing. Two people retiring and both receiving an average of 7% returns over the balance of their life can have very different results based on timing.

The new intro page to FireCalc gives a super explanation and example of this.

Projecting your retirement financial results based on average returns is very dangerous........

Your point is well taken but you have to plan. So pick a conservative estimate for your return (mine is 5.75%), inflation on the high side and have a strategy for dealing with a prolonged bear market.

DD

 

[wheel9]

I have been using a 4.5% return to be on the safe side of projections for post-retirement, and 5.5% for pre-retirement. Effect has been to accumulate faster, and as retirement approaches, hopefully, funds will be able to last longer.

 

[FIREd]

I am using 7%. In 2001 my FA used 12% in his projections, he changed to 10% in 2003 and then, at my demand, to 8% in 2005 (our portfolio was about 90% stocks back then). Looking forward, Morningstar projects annual returns of 5.5% for bonds, 7.6% for US large caps and about 8.2 to 8.4% for riskier stocks (small caps and foreign). Morningstar predicts a 7.5% return for my overall portfolio, so I use 7% to be on the conservative side.

But in my opinion, the returns projected by Morningstar for stocks (on a risk adjusted basis) make them a less compelling investment than in the past relative to bonds. That's why my portfolio is fairly conservative for someone my age (33, 65% stocks / 35% bonds and cash). I am just not sure that, going forward, taking more risk in the stock market will be rewarded accordingly. I might be wrong, but in the mean time I am very comfortable with that asset allocation.

But I noticed that a few financial gurus still use 10% annual returns, like Dave Ramsey on his new Fox Business show...

 

[Midpack]

Unfortunately the options given for this poll don't provide a good distribution --- the "bins" are too wide and the cutoffs are too close to whole numbers (I would doubt most people use anything finer than 0.5% and most use whole numbers).

I use 7% (and it's not uncommon as shown by posts above), but I almost chose 5-6.99% since it's within a hundredth. And I usually look at 6% too, so I would straddle two bins.

It looks like a few might confuse with net of inflation too...hindsight is a wonderful thing (from personal experience).

 

[baldeagle]

Financial guru, Dave Ramsey, and Fox news all in the same sentence?

 

[Maurice]

lol, baldeagle.

 

[youbet]

Your point is well taken but you have to plan. So pick a conservative estimate for your return (mine is 5.75%), inflation on the high side and have a strategy for dealing with a prolonged bear market.

DD

With the free SW available now or web tools such as FireCalc, it's no longer necessary to do planning assuming constant average returns. It's too bad some of the guru's keep insisting on expressing market performance in terms of only constant central tendencies since, for most of us, variability will be high and timing will be key.

 

[Maurice]

I can't say that I have 'a' projection. I suppose theres an implicit projection in a 4% SWR, which is my plan. I suppose forecasting the exact end of the accumulation phase would require a single number, but I've not really done that. I have a spreadsheet that shows a range of projections, but, at the risk of sounding flip, que sera sera.

 

[d]

have been using 7.5% nominal, 4-4.5% real.

 

[Bikerdude]

I use 5% so I build in another buffer. My expectations are low and my results are usually higher. ... sleeping like a baby

ditto.

 

[prgsdw]

Yes, I do pretty much the same. Right now I'm using 6%. We were using 8% till 4 years ago, then we reset our expectations. Right now we are allocated a little heavy to cash, (according to Morningstar XRay) 61% cash, 31.5% stocks and the remaining 7.5% in bonds. We are moving some of that cash to equities monthly, primarily T. Rowe Price Capital Appreciation as well as buying some I-Bonds. We paid off our house last year and I have 31 years till my full retirement age, so we're basically working towards early retirement in 20-25 years at this point.

 

[Independent]

With the free SW available now or web tools such as FireCalc, it's no longer necessary to do planning assuming constant average returns. It's too bad some of the guru's keep insisting on expressing market performance in terms of only constant central tendencies since, for most of us, variability will be high and timing will be key.

Right. Unless you're very young or deeply into TIPS, you should be using some sort of Monte Carlo projections.
(And some people would say the same thing even if you are into TIPS.)

 

[unclemick]

Hmmm - I use my Vanguard analyzer for my portfolio - 9.215% and I do not plan on croaking for another 24.60 years.

A rough estimate handgrenade wise. .

That third decimal place proved a little pesky in the first 14 years of ER - but I expect to hone in on a tighter estimate as I move into 'serious' retirement.

heh heh heh - funny though - history and Mr Market seem to conspire against my er ah fine prognostications. . 1977 - 1992 at work I had a no. 2 pencil and 8% and 10% lines on a raggedity sheet of K&E graph paper with my wiggly squiggly 401k balances plotted on it.

 

[whitestick]

Something greater

Looked at actual for the last 3 years and use the low end of that, even though it's higher then the brackets of the poll. Expenses track about 4% except for taxes. They are obviously higher since income is higher. Still use the higher number as a planning number specifically because of the tax implications yearly, and what it will do when RMDs begin at 70 1/2 from the IRA. Using options causes the income to be treated as short term capital gains, which adds to pensions and SS, when that kicks in, thus taxes become a much larger issue for me then the majority of folks with the LTCG. Thus the split calculation.
Use the expenses number as a planned spend number, with difference available when big items/travel are desired.

 

[Rambler]

Usually use 9% for equity and 3-4% for bonds but have not played with the spreadsheets for a while. combined it is around 7%, but I typically discount it to 6-6.5% combined.
R

 

[SecondCor521]

I have several inputs in my spreadsheet. For my investment returns, since I am 100% S&P 500 index, I use 10.7%, which is the Ibbotson number.

In general, I use the longest-term historical number I can find from what I consider to be a respected source for each assumption I make. So I inflate college costs at 5.9% per the College Board's annual report, I inflate SS COLA's at around 2% I think.

After I do that I build my projections based on those assumptions and my current actual data. Then I watch the results over time. If reality matches my assumptions, then my projections should not change over time. If reality turns out to be trending worse than my assumptions, then my projections should slowly get worse. If reality turns out to be better than I assume, then my projections should slowly get better.

Overall, it turns out that this last case seems to be my situation. A large part of this is that I am projecting something like 4% inflation on my expenses but my expenses have actually been holding steady and/or dropping slightly over the past year.

2Cor521