You're trying to cast doubt on a decades long retirement being successful when even the most staunch believers in predicting market returns won't go out beyond ten years. Sequence of returns risk is the bugaboo to be concerned about, not 3% returns.JackoC wrote: ↑Sun Sep 30, 2018 8:27 pmAgain for bonds now the expected return is definitely lower than historical. Not for the next 5 or 10 yrs, but all the way out to the longest bonds, 30 yr TIPS yields 1%. It's hard to see a reasonable argument to assume more than the yield of bonds (more or less anyway) for expected return out to their maturity. And yields now *are* about 2% lower than the historical realized return of bonds. IOW the real yield on bonds now is more like 2/3's lower than the historical average realized return...yet that's clearly what it is. So that 'it's X% lower' argument is not very compelling IMO.EnjoyIt wrote: ↑Sun Sep 30, 2018 5:03 pm
My mistake on the 8.7%..It is 8.4% nominal or 5.4% real. Either way, we are not talking about returns over only 5-10 years. We are talking about returns over 20-30 years. I don't know about you, but to me it appears there is a lot of crystal ball utilization in what is being predicted. 3% real returns would mean that we should expect worse than 56% of our average over the last century for the next 20-30 years which seams like a pretty strong prediction.
And hey, maybe you are right. If that is the case I would rather fly to Europe every other year as opposed to once a year if it means not wasting another 10-20% of my healthy life saving for that extra vacation.
For stocks of course it's fuzzier, inherently. But I think the bond case illustrates the general idea that there's nothing that special about the historical return in estimating the expected return. Stock like bond valuations are higher now than they usually have been, implying a lower expected return than historical. How much lower is open to reasonable debate, but there just isn't a lot of logic in assuming the expected return of a given financial asset will be the historical return, as often as that assumption is employed. That would be true if assets didn't ever become steadily cheaper or more expensive relative to their payoffs, but both stocks and bonds have, become steadily more expensive relative to their payoffs in last few decades. Assuming 'the market knows what it's doing'* that means lower expected return now than historical return, and 2% lower is somewhere in the ballpark, though not as conservative as I assume for my own planning.
*assuming the market is mispricing and valuations will fall, the expected return should be lower still, a lot more than 2% below historical, anyway I don't assume that.
Kitces found that even when the starting CAPE value for a 30 year retirement was in the highest quintile, the lowest safe withdrawal rate was 4.4%. He also found that starting CAPE values only shifted the subsequent 30 year return by about +/-1%, certainly not enough to cast doubt on the viability of something like the '4% rule of thumb'.