Real Return Poll

[Cut-Throat]

I am wondering what Percent of Real Investment Return are people here using to plan for their Retirement?

[grok87]

I think 3% is very doable.
See this thread for example
http://www.bogleheads.org/forum/viewtopic.php?t=84168
cheers,

[natureexplorer]

For equities I simply assume that the dividend yield is the real yield.

For bonds I simply assume that the real yield of TIPS represents the real yields of most AAA bonds.

A global equity portfolio should yield about 2.5% these days and TIPS should yield about zero. So a 60/40 AA should have a real yield of about 1.5.

Obviously, this is simplified.

[pauliec84]

Why not include the stock buybacks with the dividend yield? http://www.cbsnews.com/8301-505123_162- ... ash-yield/

[nisiprius]

Cut-Throat PM'ed me to ask what number I was using. I'm reluctant to say anything because I haven't a clue. I've made my bed, it's time to lie in it, my wife and I will follow the Taylor Larimore withdrawal system and hope we can adjust spending to income, which, after all, we've been doing for decades.

Uncertainty of future medical insurance and out of pocket costs (i.e. Medicare part A, B, D + Medigap + out-of-pocket for now, and whatever that metamorphoses to in the future) loom in our thinking as a much bigger uncertainty than investment returns. I expect insurance options to gradually degrade over time, meaning that the individual's medical costs, even with insurance, will become less and less plannable and more and more subject to one's individual health. You know the sort of thing: start going to cheaper Medigap plans with bigger holes in them because we won't be able to afford the high end one, etc. Forget the equity risk premium, what I want to know is how long health care costs will keep rising at the current 6%/year, and what happens after that.

This is not not not advice, this is just, well, he asked. I don't think I'm a disastrously bad manager of our retirement portfolio but I'm not a maestro, and nothing's really been tested yet because nothing in our early semiretirement years has gone according to plan! Mostly better than plan: we haven't actually begun withdrawals yet.

I'm anticipating a few years of slightly negative real return. My game plan is to try to hold spending to the actual nominal investment earnings--the actual number of dollars that appears in the money market account when I turn off all the "reinvest" boxes, plus the calculated interest earned by our I bonds--and see how that goes. Our nest egg is going to get dinged, measured in real dollars, I think that's inevitable. Psychologically, we might be able to avoid a nominal ding, and if we see the same number of dollars three years from today as we do today, I'll call it good.

After that, if we can get zero real return, we should be OK--not need to move out of our house or make other wrenching life changes. If conservative investments earn less than zero real return and keep doing it for a decade, we're in trouble--unless we conveniently get a good bull market in stocks at the same time.

Back around 2007 I dove into Fidelity Retirement Income Planner, which is Fidelity's FIRECalc-like-thingy. It "suggested" that I plan on living to age 94, and it bases its default projections on the lowest decile performance of the stock market--the numbers that it exceeded 90% of the time. I played around with it and said, "Yeah, we can swing that, especially if I can pick up some part-time work here and there," and called it good.

Interestingly enough, the automated tool complained that my portfolio was too conservative and suggested upping the stock percentage--and when I actually tried it and cranked their suggestion in, it gave me virtually the same results! That is, it didn't improve portfolio survival assuming lowest-decile performance, but of course gave me a bigger average "terminal wealth" value. That was perhaps my first experience of a surprisingly uniform feature of all withdrawal scenario tools.

As to what box to check in the poll: oh, I don't know. A bit less than 0% real for several years, 1-2% overall. I definitely hope for better than that, my "maximum likelihood estimate" would be better than that, but if we can get that we should be OK. So, say 1%.

[Kenkat]

I set my expected real return at 5% back in 1999 and have used that for planning since. This is based on a fairly aggressive allocation including riskier asset classes such as Small Value, Emerging Markets, etc. I am somewhat off plan (negatively) since 1999 but not hopelessly so.

I am not sure 5% real is achievable going forward but I am not yet ready to give up on that number.

Rick Ferri has in the past published some really good future expected returns by asset class. Of course they are projections, but are good as a thought exercise.

Adding - looked them up and found the list here:

http://www.portfoliosolutions.com/f-13.html

[Midpack]

I am planning on 0-2% and hoping for better as history would suggest. And kudos to the OP for not polling inflation or returns, real returns in far more useful IMHO.

[MathWizard]

I'm using 4% real return currently.

I'm surprised to see such low numbers.

When I was using 5-6% real long-term during the go-go 90's
everybody I talked to thought I was way too low.

Is this confirmation that I am in the right ballpark?

[Mitchell777]

Before or after taxes?

[Cut-Throat]

I'm using 4% real return currently.

I'm surprised to see such low numbers.

When I was using 5-6% real long-term during the go-go 90's
everybody I talked to thought I was way too low.

Is this confirmation that I am in the right ballpark?

When I talked with an Investment 'Advisor' at Charles Schwab in 2000. I was using 5% real then. The Schwab guy said that I was the only one he talked to that had a number lower than 12%.....LOL...He thought mine was reasonable....Today with my High Allocation towards Bonds, I have Set my Planning number at 2%.....The Flat decade of 2000-2010 Adjusted my reality! Unlike you, I'm surprised at the relatively high numbers in this poll

[chaz]

I'm retired.

[Cut-Throat]

I'm retired.

So am I, but I still plan for the next 40 years.

[Sheepdog]

Retired over 13 years, living off of the return. I have slightly more than I had when I retired. My real return? Don't know, but enough.

[Sammy_M]

Gordon: 3.36%
1/PE10: 4.55%

So I'm assuming 4% equity real returns. Estimate increases if you Small/Value tilt. Decreases as you add fixed income. I'm assuming 4% for my portfolio.

[Rodc]

I said 3%, but really the question does not compute as I don't plan that way.

I can't control real return. I made a plan that is as sound as I can reasonably make it and when I retire I'll have some amount of money and I'll make due.

I do project out to retirement with a low, middle and high assumed return just as a back of the envelop calculation of 2%, 3.5% and 5%. If I start to fall below the bottom one I can either try to work longer or plan to spend less or some combination.

Honestly if the real return is zero I might be disappointed, but I will be ok.

When I feel like using a sharper pencil I run Monte Carlo sims where you must also specify an assumed standard deviation. But while that is great for making lots of numbers and pretty graphs, I still can't actually control the future.

[Cut-Throat]

But while that is great for making lots of numbers and pretty graphs, I still can't actually control the future.

Well, you can control some of the future by the Asset Allocation you set and the Withdrawal rate and Method you choose.

[HomerJ]

Planning on 2%

Expecting greater than 3%

I can't believe that you cut off the poll at >3%...

Talk about recency basis... I very much expect to see much larger than 3% real returns over the next 30 years.

Still, I plan for 2%, just in case.

[Boglenaut]

You need an "other" category.

I don't assume any value... just save as fast as we can.

[Cut-Throat]

I can't believe that you cut off the poll at >3%...

Talk about recency basis... I very much expect to see much larger than 3% real returns over the next 30 years.

Still, I plan for 2%, just in case.

I think the people living in Japan would believe it.

[ruralavalon]

I am wondering what Percent of Real Investment Return are people here using to plan for their Retirement?

We didn't use any rate of return in planning.

I am now retired. We saved what we could when we could, and invested the savings. Paraphrasing RodC : "I can't control real return. I made a plan that [was] as sound as I [could] reasonably make it and when I retire[d] some amount of money and I'll make due."

[kenyan]

4% is what I currently use, but it's a long way off so I don't take the numbers too seriously (nor do I really 'plan' based upon that number, but I use it when curious).

Agree that despite analysis to back various claims up, there may be some recency bias in the pessimism.

[Sammy_M]

Larry Swedroe and others have argued that estimating returns is an essential part of a sound plan. It helps determine "need" to take risk. If you're already saving what you can afford to save, and you assume an unrealistically low rate of return, you'll need to take more equity risk in your portfolio to achieve your goals.

I prefer to save aggressively and take only the amount of risk I need to take using reasonable real return assumptions. If I'm too high with my estimates, I'll work a little longer. That's better to me than using a rule of thumb like Age in Bonds or Max Loss x 2, both of which are based on history. The future may not look like the past.

[Midpack]

I'm retired.

Which makes real return even more important IMO, unless you have a generous COLAd pension and retiree health care...I don't.

[HomerJ]

I can't believe that you cut off the poll at >3%...

Talk about recency basis... I very much expect to see much larger than 3% real returns over the next 30 years.

Still, I plan for 2%, just in case.

I think the people living in Japan would believe it.

Do you live in Japan? And more importantly, do you invest only in Japan?

[Cut-Throat]

Do you live in Japan? And more importantly, do you invest only in Japan?

Are you Serious? :roll:
.......The point is that our economy might behave like Japan's over the next couple of decades

[Rob5TCP]

I figure on 2% - that way if I am too conservative then I will have more.
If that figure is too high, then ultimately one day, I will be eating into principal.

[ruralavalon]

I am wondering what Percent of Real Investment Return are people here using to plan for their Retirement?

If you're already saving what you can afford to save, and you assume an unrealistically low rate of return, you'll need to take more equity risk in your portfolio to achieve your goals.

And I think adding risk could easily back fire; if someone is already saving what he/she can, its a really bad idea to add more risk in the hope of juicing returns.

And changing an assumption about anything (e.g. assumed rate of return) changes nothing in the real world. Better to change either the savings rate, or the goal, or both.

We didn't use any particular assumed rate of return in planning. I did play around with different on-line calculators,and assumed rates of return, in deciding whether to increase savings and/or change goals.

[Rodc]

But while that is great for making lots of numbers and pretty graphs, I still can't actually control the future.

Well, you can control some of the future by the Asset Allocation you set and the Withdrawal rate and Method you choose.

This may be a nit, but I think it is more correct to say you can to some degree control how the uncertain future of the markets effect you, but you cannot control the future. In this example, Monte Carlo, the future in question is the mean rate of return, standard deviation of return, and correlation of returns from different asset classes. I can only assume them, I can't control them.

[Sammy_M]

And I think adding risk could easily back fire

Yes, I believe this is exactly the point.

if someone is already saving what he/she can, its a really bad idea to add more risk in the hope of juicing returns.

On this we differ. Following this logic would suggest that one should never invest in anything but I-Bonds or TIPS. Anyone who invests in equities is hoping to juice returns. Zvi Bodie makes this point very well. You start your planning with I-Bonds/TIPS. If you need more return, you have to take more risk. But only take that much more risk and no more.

If your point is that someone should not buy new cars every couple of years because they are banking on 7+% returns, then I agree. If your suggesting Age in Bonds or the like is a superior approach to determining asset allocation, I disagree.

[NoRoboGuy]

As has been said many times... it's about both need and ability to take risk. It is a different calculation for each person.

[awval999]

Holy recenty bias batman.

I tell you this; if we can't get >3% real return in a reasonable asset allocation it is all over and the house of the economical world is over. Pensions can't be paid, economy can't grow, social security can't be paid, debt can't be grown out of.

If any of you truly believes that over the next 40-50 years will yield a real return of zero you might as well stop saving and buy some guns, ammo and seeds. You have to realize this.

[Cut-Throat]

Holy recenty bias batman.

I tell you this; if we can't get >3% real return in a reasonable asset allocation it is all over and the house of the economical world is over. Pensions can't be paid, economy can't grow, social security can't be paid, debt can't be grown out of.

If any of you truly believes that over the next 40-50 years will yield a real return of zero you might as well stop saving and buy some guns, ammo and seeds. You have to realize this.

Put down the Koolaid and turn off Fox News........

[awval999]

Holy recenty bias batman.

I tell you this; if we can't get >3% real return in a reasonable asset allocation it is all over and the house of the economical world is over. Pensions can't be paid, economy can't grow, social security can't be paid, debt can't be grown out of.

If any of you truly believes that over the next 40-50 years will yield a real return of zero you might as well stop saving and buy some guns, ammo and seeds. You have to realize this.

Put down the Koolaid and turn off Fox News........

Put down the Koolaid and turn off zerohedge.

All I'm saying is that assuming a real return of 0% for the rest of eternity is just ludicris. If anyone here truly believes that our economy will never grow and the top 10% of savers (ie: the bogleheads) cannot retire then how do you think the other 90% of americans will ever be able to? How will the pensions ever get paid? It's just not possible. Worrying about this is equivalent to worrying about other black swans such as nuclear war and zombie infestations.

[nisiprius]

All I'm saying is that assuming a real return of 0% for the rest of eternity is just ludicrous.

The poll isn't about the rest of eternity, it's about planning for retirement. In my case that would be the next few decades. And it's not about assuming, it's about planning.

Planning for the possibility of a real return of 0% for the next seventeen years is not ludicrous, because it's actually happened before (1966-1982). "It's just not possible?" If it's actually happened before--just three decades ago--it's possible. And there's no reason why it couldn't be a little worse next time. "Worrying about this is equivalent to worrying about other black swans such as nuclear war and zombie infestations?" I'm not worrying about it too much, but it's certainly a possibility to be taken account of in planning. "Nuclear war?" A 3.33% safe withdrawal rate instead of a 4% safe withdrawal rate is comparable to nuclear war?

[Anon1234]

I thought 3% real with 75/25 was conservative. [33.5% TSM, 25% TISM, 10% SCV, 6.5% REIT, 25% TBM].

Plan A is 3% real and retire at 55 on 3-3.5% withdrawals. Plan B is work up to 65. Plan C is to collect social security (which is not part of A or B). Plan D is reduce expenses.

I used to worry about lack of subsidized/free healthcare, then I thought, "hey, no healthcare will increase my portfolio's probability of success." Less so if I go second.

[hq38sq43]

"Financial genius is a short memory and a rising market."

--John Kenneth Galbraith

[awval999]

All I'm saying is that assuming a real return of 0% for the rest of eternity is just ludicrous.

The poll isn't about the rest of eternity, it's about planning for retirement. In my case that would be the next few decades. And it's not about assuming, it's about planning.

Planning for the possibility of a real return of 0% for the next seventeen years is not ludicrous, because it's actually happened before (1966-1982). "It's just not possible?" If it's actually happened before--just three decades ago--it's possible. And there's no reason why it couldn't be a little worse next time. "Worrying about this is equivalent to worrying about other black swans such as nuclear war and zombie infestations?" I'm not worrying about it too much, but it's certainly a possibility to be taken account of in planning. "Nuclear war?" A 3.33% safe withdrawal rate instead of a 4% safe withdrawal rate is comparable to nuclear war?

I agree different posters have different time horizons. I just wonder if 10 years from now we will have a discussion with something like this: "Is an 8% withdrawl rate too conservative?"

[john94549]

My wife and I are pushing 65. I'm retired and my wife might work a few more years, or not. That said, we could make do on 0% real going forward. Anything more than that would be nice, but not essential. I suppose if exactly "zero" had been an option, I would have picked it. Since -.00001 is less than zero, I picked "less than zero."

[Noobvestor]

Do you live in Japan? And more importantly, do you invest only in Japan?

Are you Serious? :roll:
.......The point is that our economy might behave like Japan's over the next couple of decades

Are you serious? Japan didn't teach you not to invest in only one country, the US (or wherever you live) included? :roll:

[Kevin M]

I've never been sophisticated enough to incorporate any return estimates into my planning. Just lived frugally, saved as much as possible, incurred no debt other than real estate (which I paid off as quickly as possible), and ended up with what I think is enough to last me to the end, even with 0% real return (now retired). A large negative real return might be a problem

Kevin

[Cut-Throat]

Are you serious? Japan didn't teach you not to invest in only one country, the US (or wherever you live) included? :roll:

So, you've never heard of a Global Recession?

[grayfox]

I don't know if anyone noticed, but yesterday (Friday) BEA released U.S. GDP for 4th Quarter 2011. All the new papers reported the Q42011 2.8% growth and said it was not that great. What no one seems to have notice is that Real GDP growth for 2011 was only 1.72%. Eleven years into the 21st century, and, so far, U.S. economic growth in the this century has been weak. I calculate 1.569% CAGR since 2000.

So if 2% real GDP growth long-term means 2% earnings growth long-term, then with 2% dividend yield the S&P 500 can be expected to return about 4% real. (Gordon Equation)

Meanwhile, intermediate-term Treasuries have negative real YTM. You have to go out in maturity 13 years to get slightly positive.
TIPS 5-Year -1.167%
TIPS 10-Year -0.208%
TIPS 30-Year +0.710%

So unless investors extend maturity and/or add credit risk, the expected return is negative. With the recent Fed announcement extending low rates, this situation can be expected to persist for years. Going out 24.4 year with Vanguard LT Investment-Grade has YTM of 5%, so 2% real return after 3% inflation.

Let's say you bonds are expected real return 1% and stocks 4%. 50/50 stocks/bonds would be 2.5%.

I voted 2% for planning purposes.

[Sammy_M]

So if 2% real GDP growth long-term means 2% earnings growth long-term, then with 2% dividend yield the S&P 500 can be expected to return about 4% real. (Gordon Equation)

I thought long term US GDP growth is more like 1.3% real (maybe I got this from a W. Bernstein's book?).

[Buckeye]

my estimates are:

50/50 domestic stocks/domestic fixed at 2.6 real for next 30 years.

50/50 international stocks/international fixed at 3.8 real for next 30 years.

I picked 3%.

[nisiprius]

I just wonder if 10 years from now we will have a discussion with something like this: "Is an 8% withdrawal rate too conservative?"

Oh, boy, I sure hope so. And I think there's a real chance it could happen. But it isn't anything I'm planning for.

[grayfox]

So if 2% real GDP growth long-term means 2% earnings growth long-term, then with 2% dividend yield the S&P 500 can be expected to return about 4% real. (Gordon Equation)

I thought long term US GDP growth is more like 1.3% real (maybe I got this from a W. Bernstein's book?).

I think that U.S. Real GDP growth has compounded at something like 3.2% p.a. over some long period, maybe since 1926 or 1950.

Maybe 1.3% is real growth in earnings or dividends. If it's dividend growth, then with 2% yield, then, from Gordon equation, expected return from S&P 500 is only 3.3% But European stocks I think have 3% or 4% yield [VGK], so if you mix in some foreign stocks, maybe it is not so bad.

Edit: But then on the other hand, if dividends only grew by 1.3% when RGDP grew by 3.2%, at what rate will dividends grow if RGDP growth rate is 2% ? Something to think about in a word of low economic growth. Maybe the only return from stocks will be the dividend yield. [Which has actually been the case since 2000]

[Cut-Throat]

I am surprised at the Optimism of this poll. - I would have thought that not many folks would have voted for a >3% real return.

[NoRoboGuy]

Using Rick Ferri's 30 year market forecast, I am estimating overall 4% real. These are only expected returns. Actual returns can and almost always do vary. I agree with those claiming recency bias. I just use 30-year estimates then accept what the market generates.

[Rodc]

I just wonder if 10 years from now we will have a discussion with something like this: "Is an 8% withdrawal rate too conservative?"

Oh, boy, I sure hope so. And I think there's a real chance it could happen. But it isn't anything I'm planning for.

yes, because few will have enough to live on 4% due to the 20 years of 0% real return. They will need to start at 8% and pray. (jk)

[market timer]

I tell you this; if we can't get >3% real return in a reasonable asset allocation it is all over and the house of the economical world is over. Pensions can't be paid, economy can't grow, social security can't be paid, debt can't be grown out of.

I don't think we'll get 3% real on a typical 60/40 portfolio. Debts and pensions will need to be restructured, but they will be paid in some form. The best defense is to find a career that makes you happy and can pay the bills into old age.