what % return do you use?

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DrGoogle2017
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Re: what % return do you use?

Post by DrGoogle2017 » Thu Nov 02, 2017 3:00 pm

ThriftyPhD wrote:
Thu Nov 02, 2017 11:42 am
DrGoogle2017 wrote:
Wed Nov 01, 2017 6:32 pm
I actually used 0% of real return. For me it’s always best to plan for worst case and hoping for the best. When I was younger and in the planning phase, I used to plan at 15%, I looked down on 8%. Man plans and God laughs, that kind of saying.
Gill wrote:
Wed Nov 01, 2017 4:34 pm
I have always used 0% as expected return, taking the conservative approach that my portfolio will only grow through net additions of principal.
Gill
Grt2bOutdoors wrote:
Thu Nov 02, 2017 6:10 am
I use a range;
Pessimistic- 0 real
Middle of the road average: 1%
Optimistic 2.5% real
Jimmy Buffett Margaritaville: 4% real
Why is 0% the worst case? What if it's -10%? Or even -20%? That would be much worse.

And there is the problem with trying to be 'conservative' or 'pessimistic'. You can always be more conservative or pessimistic. This leads many to avoid putting ANYTHING in the market, since they just assume they'll lose everything. If you're pessimistic and assume -10% growth in the market, why would you invest? Even at 0% growth, why bother with any of it? Of course, instead they're losing to inflation.

delamer wrote:
Wed Nov 01, 2017 4:20 pm
Try your projections using a variety of real returns (including zero) for the next 10 years. Seven percent means something very different with 2% inflation than it does with 5% inflation.

It is better to consider a range of outcomes and see how those fit with your needs and plans.
I think this is the way to do it. See how much things change with pessimistic, average, and optimistic results.
There is a difference between conservative and pessimistic. It’s real return, so that’s already included inflation.

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whatusername?
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Re: what % return do you use?

Post by whatusername? » Thu Nov 02, 2017 3:08 pm

I use 0.75% real return in planning because when I calculate the net present value of what I will need to retire, and then feed that number into FireCalc for my expected length of retirement, it fails in 0 historical cycles. This is actually true up to about 1% real, but I'd rather err on the side of the conservative. But then I build in a cushion because you can't tell the future with any certainty from looking at the past.

(In all likelihood, I will probably die with money, but I would rather that than live my old age without any).

MathWizard
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Re: what % return do you use?

Post by MathWizard » Thu Nov 02, 2017 3:09 pm

I use 4% real (inflation adjusted).

7% nominal (not inflation adjusted) might be not too for off, but what is $1 Million
going to buy in 30 years? It seems easier to do everything in real terms.

Admiral
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Re: what % return do you use?

Post by Admiral » Thu Nov 02, 2017 3:31 pm

I sure hope the wizards who run big pension funds don't read this thread! 0%, 1%, 2%! Those returns are so far below historical averages it's kind of ridiculous. The future may not be like the past, but the past is all we have to go by. Are companies just going to stop innovating and not make anywhere near the profits of the past...recent or not so recent? I just don't see that happening. YMMV of course.

ThriftyPhD
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Re: what % return do you use?

Post by ThriftyPhD » Thu Nov 02, 2017 4:02 pm

DrGoogle2017 wrote:
Thu Nov 02, 2017 3:00 pm
ThriftyPhD wrote:
Thu Nov 02, 2017 11:42 am
DrGoogle2017 wrote:
Wed Nov 01, 2017 6:32 pm
I actually used 0% of real return. For me it’s always best to plan for worst case and hoping for the best. When I was younger and in the planning phase, I used to plan at 15%, I looked down on 8%. Man plans and God laughs, that kind of saying.
Gill wrote:
Wed Nov 01, 2017 4:34 pm
I have always used 0% as expected return, taking the conservative approach that my portfolio will only grow through net additions of principal.
Gill
Grt2bOutdoors wrote:
Thu Nov 02, 2017 6:10 am
I use a range;
Pessimistic- 0 real
Middle of the road average: 1%
Optimistic 2.5% real
Jimmy Buffett Margaritaville: 4% real
Why is 0% the worst case? What if it's -10%? Or even -20%? That would be much worse.

And there is the problem with trying to be 'conservative' or 'pessimistic'. You can always be more conservative or pessimistic. This leads many to avoid putting ANYTHING in the market, since they just assume they'll lose everything. If you're pessimistic and assume -10% growth in the market, why would you invest? Even at 0% growth, why bother with any of it? Of course, instead they're losing to inflation.

delamer wrote:
Wed Nov 01, 2017 4:20 pm
Try your projections using a variety of real returns (including zero) for the next 10 years. Seven percent means something very different with 2% inflation than it does with 5% inflation.

It is better to consider a range of outcomes and see how those fit with your needs and plans.
I think this is the way to do it. See how much things change with pessimistic, average, and optimistic results.
There is a difference between conservative and pessimistic. It’s real return, so that’s already included inflation.
I think the point is, if you're using 0% real return, wouldn't you be better off putting 100% in TIPS and I Bonds? This is the problem with being too conservative. If you expect a 60/40 stock/bond portfolio to do 0% real return, why would you take the risk when you could put it in inflation adjusted securities and reduce risk?

DrGoogle2017
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Re: what % return do you use?

Post by DrGoogle2017 » Thu Nov 02, 2017 4:10 pm

@ThriftyPHD, it’s in the planning phase. It’s not what one believes or how one should invest. My retirement account went up 50% more than when I first planned 2011, I retired in 2015. But it gives me peace of mine to know that even with that amount in 2011, I could retire in 2015. I’ve never once had to worry about having enough money to retire. I had a huge cushion. I didn’t know the market would go up or down. Same with expense, I had a cushion of 25%. I like to plan more conservatively. YMMV.
Last edited by DrGoogle2017 on Thu Nov 02, 2017 4:12 pm, edited 1 time in total.

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TomatoTomahto
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Re: what % return do you use?

Post by TomatoTomahto » Thu Nov 02, 2017 4:12 pm

DrGoogle2017 wrote:
Thu Nov 02, 2017 4:10 pm
@ThriftyPHD, it’s in the planning phase. It’s not what one believes or would do. My retirement account went up 50% more than when I first planned 2011, I retired in 2015. But it gives me peace of mine to know that even with that amount in 2011, I could retire in 2015. I’ve never once had to worry about having enough money to retire. I had a huge cushion. I didn’t know the market would go up or down. Same with expense, I had a cushion of 25%. I like to plan more conservatively. YMMV.
Yup. Like the doctor said.

ThrustVectoring
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Re: what % return do you use?

Post by ThrustVectoring » Thu Nov 02, 2017 6:53 pm

I use different numbers for different purposes. For investment choice purposes, I expect the stock market to have a nominal return of 6%. That is, I'll automatically choose to pay down debts with a higher interest rate, etc.

For retirement planning, I make sure things work with a real return of zero. I don't want to rely on market returns. I'll take them if they're there and retire earlier, sure, but my overall plan is to save 25 years of expenses by the time I hit 60.

Grt2bOutdoors
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Location: New York

Re: what % return do you use?

Post by Grt2bOutdoors » Thu Nov 02, 2017 7:12 pm

DrGoogle2017 wrote:
Thu Nov 02, 2017 4:10 pm
@ThriftyPHD, it’s in the planning phase. It’s not what one believes or how one should invest. My retirement account went up 50% more than when I first planned 2011, I retired in 2015. But it gives me peace of mine to know that even with that amount in 2011, I could retire in 2015. I’ve never once had to worry about having enough money to retire. I had a huge cushion. I didn’t know the market would go up or down. Same with expense, I had a cushion of 25%. I like to plan more conservatively. YMMV.
+1. Precisely, I am planning with a buffer in mind.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Tyler9000
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Re: what % return do you use?

Post by Tyler9000 » Thu Nov 02, 2017 9:15 pm

des999 wrote:
Wed Nov 01, 2017 3:13 pm
Basically, most sites you read say 7% is a fairly common number to use for returns over the long haul, and I tend to agree. But, when you are less than 10 years away from your number, the accuracy of that 7% return seems to be much more volatile.

How many that have less than 10 years till FIRE are using something lower than 7% and if so, what? Especially if you consider the recent bull run we've been on, it seems almost impossible to expect and average of 7% over the next 10 years.

Is anyone worried they won't hit their FIRE date as soon as they'd like? I think I have been spoiled watching my stache grow month after month, year after year since basically I started saving.
Yes, uncertainty in investing can complicate even the best plans and it's not uncommon to be even more acutely aware of that as you approach retirement.

Rather than over-simplifying it to a single number, you might enjoy this Portfolio Growth calculator that shows the full range of real-life historical outcomes for the compound growth of any asset allocation you like. And taking it a step further, here's a Financial Independence calculator that layers those same growth calculations with withdrawal rates numbers to specifically study how asset allocation affects the uncertainty of your final retirement date. (If that last one is a little confusing, read this explanation).

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ruralavalon
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Re: what % return do you use?

Post by ruralavalon » Fri Nov 03, 2017 10:25 am

ThrustVectoring wrote:
Thu Nov 02, 2017 6:53 pm
I use different numbers for different purposes. For investment choice purposes, I expect the stock market to have a nominal return of 6%. That is, I'll automatically choose to pay down debts with a higher interest rate, etc.

For retirement planning, I make sure things work with a real return of zero. I don't want to rely on market returns. I'll take them if they're there and retire earlier, sure, but my overall plan is to save 25 years of expenses by the time I hit 60.
I like the thought process, the number to use it really depends on the use intended for the number.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

sco
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Re: what % return do you use?

Post by sco » Fri Nov 03, 2017 10:37 am

My guess is 5% real.

Just so I have some idea, I know that it won't end up being as linear..

smitcat
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Re: what % return do you use?

Post by smitcat » Fri Nov 03, 2017 10:50 am

ruralavalon wrote:
Fri Nov 03, 2017 10:25 am
ThrustVectoring wrote:
Thu Nov 02, 2017 6:53 pm
I use different numbers for different purposes. For investment choice purposes, I expect the stock market to have a nominal return of 6%. That is, I'll automatically choose to pay down debts with a higher interest rate, etc.

For retirement planning, I make sure things work with a real return of zero. I don't want to rely on market returns. I'll take them if they're there and retire earlier, sure, but my overall plan is to save 25 years of expenses by the time I hit 60.
I like the thought process, the number to use it really depends on the use intended for the number.
I think I agree but not completely sure.
For planning to retire I make sure I can live with a zero or near zero return.
But for planning retirement actions and strategies I use another return rate so that I can get these decisions made:
- When to take SS
- Where to place funds in accounts (tax deferred, after tax, Roth)
- When & how much to Roth convert
- If and when I might annuitize funds
etc

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