Typical interest rate earned by target date funds in retirement?

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fortfun
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Typical interest rate earned by target date funds in retirement?

Post by fortfun » Mon May 21, 2018 1:46 pm

Is there a common interest rate that people use once they enter retirement and begin drawing retirement? For instance, would a target date earn 3% interest once it reaches the target date (on average, over 30 years)?

Silk McCue
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Re: Typical interest rate earned by target date funds in retirement?

Post by Silk McCue » Mon May 21, 2018 2:21 pm

For Vanguard Target Date funds all eventually glide path to a 30% stock 70% bond allocation 7 years after their Target date. Thus TD 2015 will have that allocation in 2022. The link below provides details on the Target Retirement Income fund including multi year period average returns that matches that allocation.

The funds allocation may or may not be appropriate for you. It all depends upon your individual circumstances.

https://personal.vanguard.com/us/funds/ ... irect=true

Cheers

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Re: Typical interest rate earned by target date funds in retirement?

Post by MotoTrojan » Mon May 21, 2018 2:23 pm

fortfun wrote:
Mon May 21, 2018 1:46 pm
Is there a common interest rate that people use once they enter retirement and begin drawing retirement? For instance, would a target date earn 3% interest once it reaches the target date (on average, over 30 years)?
Interest isn't really the right term. You have price appreciation and dividends (which can be reinvested or taken as cash). 3% withdrawal would be considered perpetually safe (will never go to $0) by most on the site, but that includes both price appreciation (shares will need to be sold) and dividends. Also that is pre-tax, so you may need to withdraw more than you ultimately spend.

4% is another frequently cited value.

As noted above, the 30/70 stock/bond ratio the target funds arrive at may not be what you actually want. I personally would not be that conservative unless my withdrawal rate was well under 2%.

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fortfun
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Re: Typical interest rate earned by target date funds in retirement?

Post by fortfun » Mon May 21, 2018 2:49 pm

MotoTrojan wrote:
Mon May 21, 2018 2:23 pm
fortfun wrote:
Mon May 21, 2018 1:46 pm
Is there a common interest rate that people use once they enter retirement and begin drawing retirement? For instance, would a target date earn 3% interest once it reaches the target date (on average, over 30 years)?
Interest isn't really the right term. You have price appreciation and dividends (which can be reinvested or taken as cash). 3% withdrawal would be considered perpetually safe (will never go to $0) by most on the site, but that includes both price appreciation (shares will need to be sold) and dividends. Also that is pre-tax, so you may need to withdraw more than you ultimately spend.

4% is another frequently cited value.

As noted above, the 30/70 stock/bond ratio the target funds arrive at may not be what you actually want. I personally would not be that conservative unless my withdrawal rate was well under 2%.
Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.

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fortfun
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Re: Typical interest rate earned by target date funds in retirement?

Post by fortfun » Mon May 21, 2018 2:50 pm

Silk McCue wrote:
Mon May 21, 2018 2:21 pm
For Vanguard Target Date funds all eventually glide path to a 30% stock 70% bond allocation 7 years after their Target date. Thus TD 2015 will have that allocation in 2022. The link below provides details on the Target Retirement Income fund including multi year period average returns that matches that allocation.

The funds allocation may or may not be appropriate for you. It all depends upon your individual circumstances.

https://personal.vanguard.com/us/funds/ ... irect=true

Cheers
Thanks Silk. Very helpful. It says 5.32% from the beginning. I guess that is typical of Target Dates?

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Re: Typical interest rate earned by target date funds in retirement?

Post by Silk McCue » Mon May 21, 2018 3:03 pm

fortfun wrote:
Mon May 21, 2018 2:50 pm
Thanks Silk. Very helpful. It says 5.32% from the beginning. I guess that is typical of Target Dates?
No. I wouldn't say that it is typical of Target Dates. It is precisely what this fund has done and represents the 30/70 allocation THE ENTIRE TIME. It is the most conservative fund and over time would likely have the lowest returns because it is the least risky.

You can take a look at each of VG Target Date Funds and see their performance at Vanguard.

Cheers

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fortfun
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Re: Typical interest rate earned by target date funds in retirement?

Post by fortfun » Mon May 21, 2018 3:19 pm

Silk McCue wrote:
Mon May 21, 2018 3:03 pm
fortfun wrote:
Mon May 21, 2018 2:50 pm
Thanks Silk. Very helpful. It says 5.32% from the beginning. I guess that is typical of Target Dates?
No. I wouldn't say that it is typical of Target Dates. It is precisely what this fund has done and represents the 30/70 allocation THE ENTIRE TIME. It is the most conservative fund and over time would likely have the lowest returns because it is the least risky.

You can take a look at each of VG Target Date Funds and see their performance at Vanguard.

Cheers
Still 5.32 isn't bad. Better than most annuities, yes? I guess for the purpose of FI calculation, it isn't a bad figure to use???

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Re: Typical interest rate earned by target date funds in retirement?

Post by Silk McCue » Mon May 21, 2018 3:33 pm

fortfun wrote:
Mon May 21, 2018 3:19 pm
Silk McCue wrote:
Mon May 21, 2018 3:03 pm
fortfun wrote:
Mon May 21, 2018 2:50 pm
Thanks Silk. Very helpful. It says 5.32% from the beginning. I guess that is typical of Target Dates?
No. I wouldn't say that it is typical of Target Dates. It is precisely what this fund has done and represents the 30/70 allocation THE ENTIRE TIME. It is the most conservative fund and over time would likely have the lowest returns because it is the least risky.

You can take a look at each of VG Target Date Funds and see their performance at Vanguard.

Cheers
Still 5.32 isn't bad. Better than most annuities, yes? I guess for the purpose of FI calculation, it isn't a bad figure to use???
As long as you understand that these are numbers in the rear view mirror. Since the 3 year is 3.68 that tells you something about the lower returns somewhere in the prior 2 years since the 1 year is significantly higher.

Cheers

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Re: Typical interest rate earned by target date funds in retirement?

Post by venkman » Mon May 21, 2018 9:21 pm

fortfun wrote:
Mon May 21, 2018 2:49 pm
Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.
The 4% is based on a rule-of-thumb safe withdrawal rate, not on any particular investment. The goal of Vanguard's Target Date funds is to maintain a specific asset allocation (which gets more conservative as the target date nears); the return of any given TD fund will be dependent on whatever the returns of the stock & bond markets are. Vanguard doesn't aim for its TD funds to return any specific number.

Vanguard does have a Managed Payout Fund (VPGDX), whose stated goal is to pay out 4% in distributions every year. (Though a portion of that is return of capital, and there are no guarantees that the fund will be able to sustain the 4% payout rate.)

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Re: Typical interest rate earned by target date funds in retirement?

Post by fortfun » Mon May 21, 2018 9:51 pm

venkman wrote:
Mon May 21, 2018 9:21 pm
fortfun wrote:
Mon May 21, 2018 2:49 pm
Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.
The 4% is based on a rule-of-thumb safe withdrawal rate, not on any particular investment. The goal of Vanguard's Target Date funds is to maintain a specific asset allocation (which gets more conservative as the target date nears); the return of any given TD fund will be dependent on whatever the returns of the stock & bond markets are. Vanguard doesn't aim for its TD funds to return any specific number.

Vanguard does have a Managed Payout Fund (VPGDX), whose stated goal is to pay out 4% in distributions every year. (Though a portion of that is return of capital, and there are no guarantees that the fund will be able to sustain the 4% payout rate.)
Thanks Venkman.

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Re: Typical interest rate earned by target date funds in retirement?

Post by nyclon » Mon May 21, 2018 10:09 pm

fortfun wrote:
Mon May 21, 2018 1:46 pm
Is there a common interest rate that people use once they enter retirement and begin drawing retirement? For instance, would a target date earn 3% interest once it reaches the target date (on average, over 30 years)?
This isn't rooted in empirical data - in my personal finance models I model inflation (usually 2.5%) and bond yield as a spread above inflation - usually 1.5 to 3% above inflation.

The rationale is that all I care about is purchasing power, and after running historicals on portfolio visualizer, 3% is the inflation adjusted cagr of us bonds since 1987. Could get even more data but we don't know where rates will be in the future. And we don't know where inflation will be. I just need to guestimate the spread between the two.

As with all crystal balls, YMMV

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Re: Typical interest rate earned by target date funds in retirement?

Post by MotoTrojan » Tue May 22, 2018 9:21 am

fortfun wrote:
Mon May 21, 2018 2:49 pm
MotoTrojan wrote:
Mon May 21, 2018 2:23 pm
fortfun wrote:
Mon May 21, 2018 1:46 pm
Is there a common interest rate that people use once they enter retirement and begin drawing retirement? For instance, would a target date earn 3% interest once it reaches the target date (on average, over 30 years)?
Interest isn't really the right term. You have price appreciation and dividends (which can be reinvested or taken as cash). 3% withdrawal would be considered perpetually safe (will never go to $0) by most on the site, but that includes both price appreciation (shares will need to be sold) and dividends. Also that is pre-tax, so you may need to withdraw more than you ultimately spend.

4% is another frequently cited value.

As noted above, the 30/70 stock/bond ratio the target funds arrive at may not be what you actually want. I personally would not be that conservative unless my withdrawal rate was well under 2%.
Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.
A 7% gain (4+3%) is an unreasonable expectation of sure thing real (after inflation) return and even not certain in nominal terms.

Usually 50/50-70/30 stock/bond is recommended in retirement but some prefer less risk (opens up to different kinds of risk).

4% draw is likely a 95% sure thing but that is pre-tax, do you’ll be spending less than the full 4%.

rkhusky
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Re: Typical interest rate earned by target date funds in retirement?

Post by rkhusky » Tue May 22, 2018 10:42 am

Note that Vanguard's terminal allocation for retirement is 30/70 stock/bond, as is the Fidelity Freedom Index fund, although the latter takes longer to get there. TIAA Lifecycle funds level off at 40/60. The Government's TSP plan levels off at 20/80. I suggest that 30/70 - 50/50 is a more appropriate range of retirement allocations for most people.

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Re: Typical interest rate earned by target date funds in retirement?

Post by dharrythomas » Tue May 22, 2018 4:07 pm

The thing you need to understand about the 4% withdrawal rate is that you are spending principal as well as income. For the studies, not being at $0 at the end of the time period is considered success. With a 4% SWR, you should be prepared for a decreasing balance over time. May not happen, but you need to be mentally prepared.

Good luck.

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Re: Typical interest rate earned by target date funds in retirement?

Post by willthrill81 » Tue May 22, 2018 4:13 pm

rkhusky wrote:
Tue May 22, 2018 10:42 am
Note that Vanguard's terminal allocation for retirement is 30/70 stock/bond, as is the Fidelity Freedom Index fund, although the latter takes longer to get there. TIAA Lifecycle funds level off at 40/60. The Government's TSP plan levels off at 20/80. I suggest that 30/70 - 50/50 is a more appropriate range of retirement allocations for most people.
Based on all the work done on safe withdrawal rates and corresponding AA, Vanguard and other target date fund providers definitely seem to be catering to the risk-averse crowd with their terminal AA. Historic success rates for the '4% rule' have been highest with higher stock allocations, usually in the 50-70% range. And of course, the median terminal value of retirement portfolios has increased as the stock allocation went up as well.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Typical interest rate earned by target date funds in retirement?

Post by dbr » Tue May 22, 2018 4:25 pm

fortfun wrote:
Mon May 21, 2018 2:49 pm


Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.
That isn't how it works. One difference is most plans for retirement take inflation into account, so the annual withdrawal in nominal dollars is increased every year by inflation. Another difference is that returns are not constant from year to year and even for the same compound average return the sequence in which those annual returns occur matters. It takes models like FireCalc or Monte Carlo simulations to analyze this, and there really isn't something simpler than that.

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Re: Typical interest rate earned by target date funds in retirement?

Post by 123 » Tue May 22, 2018 4:51 pm

It's also important to keep in mind that while you may be looking at investment returns for a Target fund over a period of years there may be some individual years where it may barely have any dividends AND the value of the investment may significantly decline. Past performance is not a guarantee of future results.
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Re: Typical interest rate earned by target date funds in retirement?

Post by rkhusky » Tue May 22, 2018 8:54 pm

willthrill81 wrote:
Tue May 22, 2018 4:13 pm
Based on all the work done on safe withdrawal rates and corresponding AA, Vanguard and other target date fund providers definitely seem to be catering to the risk-averse crowd with their terminal AA. Historic success rates for the '4% rule' have been highest with higher stock allocations, usually in the 50-70% range. And of course, the median terminal value of retirement portfolios has increased as the stock allocation went up as well.
Perhaps they also take into account typical investor psychology. 70/30 doesn't work so well if the retired investor bails when the market drops 30% with no end in sight.

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Re: Typical interest rate earned by target date funds in retirement?

Post by willthrill81 » Tue May 22, 2018 9:21 pm

rkhusky wrote:
Tue May 22, 2018 8:54 pm
willthrill81 wrote:
Tue May 22, 2018 4:13 pm
Based on all the work done on safe withdrawal rates and corresponding AA, Vanguard and other target date fund providers definitely seem to be catering to the risk-averse crowd with their terminal AA. Historic success rates for the '4% rule' have been highest with higher stock allocations, usually in the 50-70% range. And of course, the median terminal value of retirement portfolios has increased as the stock allocation went up as well.
Perhaps they also take into account typical investor psychology. 70/30 doesn't work so well if the retired investor bails when the market drops 30% with no end in sight.
Hence why I said "risk-averse crowd."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Typical interest rate earned by target date funds in retirement?

Post by fortfun » Tue May 22, 2018 9:52 pm

dbr wrote:
Tue May 22, 2018 4:25 pm
fortfun wrote:
Mon May 21, 2018 2:49 pm


Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.
That isn't how it works. One difference is most plans for retirement take inflation into account, so the annual withdrawal in nominal dollars is increased every year by inflation. Another difference is that returns are not constant from year to year and even for the same compound average return the sequence in which those annual returns occur matters. It takes models like FireCalc or Monte Carlo simulations to analyze this, and there really isn't something simpler than that.
Thanks DBR. So what's the average guy to do? I guess just save up way more than he expects to need?

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Re: Typical interest rate earned by target date funds in retirement?

Post by emoore » Tue May 22, 2018 10:30 pm

fortfun wrote:
Tue May 22, 2018 9:52 pm
dbr wrote:
Tue May 22, 2018 4:25 pm
fortfun wrote:
Mon May 21, 2018 2:49 pm


Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.
That isn't how it works. One difference is most plans for retirement take inflation into account, so the annual withdrawal in nominal dollars is increased every year by inflation. Another difference is that returns are not constant from year to year and even for the same compound average return the sequence in which those annual returns occur matters. It takes models like FireCalc or Monte Carlo simulations to analyze this, and there really isn't something simpler than that.
Thanks DBR. So what's the average guy to do? I guess just save up way more than he expects to need?
Average guy would save as much as they could and live on that and SS. The debates about 4% vs. 3.5% safe withdrawal rate on this site isn’t even a consideration for most of the population.

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Re: Typical interest rate earned by target date funds in retirement?

Post by Nate79 » Wed May 23, 2018 6:44 am

Please read the wiki on safe withdrawal rates for a basic understanding of the topic.
https://www.bogleheads.org/wiki/Safe_withdrawal_rates

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Re: Typical interest rate earned by target date funds in retirement?

Post by rkhusky » Wed May 23, 2018 7:00 am

willthrill81 wrote:
Tue May 22, 2018 9:21 pm
rkhusky wrote:
Tue May 22, 2018 8:54 pm
willthrill81 wrote:
Tue May 22, 2018 4:13 pm
Based on all the work done on safe withdrawal rates and corresponding AA, Vanguard and other target date fund providers definitely seem to be catering to the risk-averse crowd with their terminal AA. Historic success rates for the '4% rule' have been highest with higher stock allocations, usually in the 50-70% range. And of course, the median terminal value of retirement portfolios has increased as the stock allocation went up as well.
Perhaps they also take into account typical investor psychology. 70/30 doesn't work so well if the retired investor bails when the market drops 30% with no end in sight.
Hence why I said "risk-averse crowd."
I agree that the big target-date funds are for the "risk-averse crowd,", but also for those who are naive about risk or uncertain about their risk tolerance. I imagine Vanguard is assuming that most of the latter are also risk-averse, even if they don't know it.

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Re: Typical interest rate earned by target date funds in retirement?

Post by RadAudit » Wed May 23, 2018 7:28 am

fortfun wrote:
Mon May 21, 2018 2:49 pm
Since 4% is frequently cited, what investment is that based on?
The 4% is based on the Trinity Studies. Interesting read. Various probabilities of success depending on AA, withdrawal rates and time.

Might be worth a look. Especially the part about it being for planning purposes. No guarantees.

Best of luck.
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Re: Typical interest rate earned by target date funds in retirement?

Post by z3r0c00l » Wed May 23, 2018 7:32 am

fortfun wrote:
Mon May 21, 2018 2:49 pm
MotoTrojan wrote:
Mon May 21, 2018 2:23 pm
fortfun wrote:
Mon May 21, 2018 1:46 pm
Is there a common interest rate that people use once they enter retirement and begin drawing retirement? For instance, would a target date earn 3% interest once it reaches the target date (on average, over 30 years)?
Interest isn't really the right term. You have price appreciation and dividends (which can be reinvested or taken as cash). 3% withdrawal would be considered perpetually safe (will never go to $0) by most on the site, but that includes both price appreciation (shares will need to be sold) and dividends. Also that is pre-tax, so you may need to withdraw more than you ultimately spend.

4% is another frequently cited value.

As noted above, the 30/70 stock/bond ratio the target funds arrive at may not be what you actually want. I personally would not be that conservative unless my withdrawal rate was well under 2%.
Thank you Moto. Since 4% is frequently cited, what investment is that based on? I'm trying to determine my FI date and I would like to have a real solid idea of these numbers. Currently, I'm using a 4% draw down and 3% gain (during that period). That gets me through 44 years without going negative.
Bear in mind that during those 40 years, the value of your 4% will easily be halved by inflation. Perhaps your expenses will decrease, although with healthcare, I wouldn't count on it.

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Re: Typical interest rate earned by target date funds in retirement?

Post by livesoft » Wed May 23, 2018 7:36 am

Nate79 wrote:
Wed May 23, 2018 6:44 am
Please read the wiki on safe withdrawal rates for a basic understanding of the topic.
https://www.bogleheads.org/wiki/Safe_withdrawal_rates
Another great set of articles from Early Retirement Now:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

They will show you where the 4% "rule-of-thumb" comes from and why, as well the pitfalls in the assumptions.

And to re-iterate: One cannot think about this as a "common interest rate." Instead, one has to think of the ebbs and flows of a portfolio and how when it goes negative, one should still be comfortable with that. (This assumes you are already comfortable when it goes positive.)
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Re: Typical interest rate earned by target date funds in retirement?

Post by goblue100 » Wed May 23, 2018 7:53 am

z3r0c00l wrote:
Wed May 23, 2018 7:32 am

Bear in mind that during those 40 years, the value of your 4% will easily be halved by inflation. Perhaps your expenses will decrease, although with healthcare, I wouldn't count on it.
I've been reading on this topic quite a bit, and the 4% "rule" for a 30 year retirement actually allows for inflation adjustment.

https://www.investopedia.com/terms/f/fo ... t-rule.asp
"While some retirees who adhere to the 4 percent rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with inflation. Possible ways to adjust for inflation include setting a flat annual increase of 2 percent per year, which is the Federal Reserve's target inflation rate, or adjusting withdrawals based on actual inflation rates. "

It was a misconception I had, that the 4% was fixed, which is why I am pointing that out. And just to further point out the obvious, the 2 percent increase is of the previous years withdrawal amount:
Year 1 = $1,000,000 x .04 = $40,000
Year 2 = ($40,000 x.02)+ $40,000 = $40,800
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Re: Typical interest rate earned by target date funds in retirement?

Post by fortfun » Wed May 23, 2018 9:11 am

livesoft wrote:
Wed May 23, 2018 7:36 am
Nate79 wrote:
Wed May 23, 2018 6:44 am
Please read the wiki on safe withdrawal rates for a basic understanding of the topic.
https://www.bogleheads.org/wiki/Safe_withdrawal_rates
Another great set of articles from Early Retirement Now:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

They will show you where the 4% "rule-of-thumb" comes from and why, as well the pitfalls in the assumptions.

And to re-iterate: One cannot think about this as a "common interest rate." Instead, one has to think of the ebbs and flows of a portfolio and how when it goes negative, one should still be comfortable with that. (This assumes you are already comfortable when it goes positive.)
Thanks Livesoft.

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fortfun
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Re: Typical interest rate earned by target date funds in retirement?

Post by fortfun » Wed May 23, 2018 9:11 am

goblue100 wrote:
Wed May 23, 2018 7:53 am
z3r0c00l wrote:
Wed May 23, 2018 7:32 am

Bear in mind that during those 40 years, the value of your 4% will easily be halved by inflation. Perhaps your expenses will decrease, although with healthcare, I wouldn't count on it.
I've been reading on this topic quite a bit, and the 4% "rule" for a 30 year retirement actually allows for inflation adjustment.

https://www.investopedia.com/terms/f/fo ... t-rule.asp
"While some retirees who adhere to the 4 percent rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with inflation. Possible ways to adjust for inflation include setting a flat annual increase of 2 percent per year, which is the Federal Reserve's target inflation rate, or adjusting withdrawals based on actual inflation rates. "

It was a misconception I had, that the 4% was fixed, which is why I am pointing that out. And just to further point out the obvious, the 2 percent increase is of the previous years withdrawal amount:
Year 1 = $1,000,000 x .04 = $40,000
Year 2 = ($40,000 x.02)+ $40,000 = $40,800
Thanks Goblue!

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