What growth rate would you use?

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lvrpl
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What growth rate would you use?

Post by lvrpl » Wed Feb 03, 2016 7:58 am

Just curious if my real growth rate assumptions for my portfolio planning are realistic or if I need to rethink them. Assume you are in your early 30s and will retire somewhere between 55 and 65 (and so will be investing for ~30 years or so). I understand the growth rate you assume bakes in some assumptions about your implied asset allocation also - that's fine (feel free to comment on that also - I'm at about a 75/25 allocation now in my early 30s). Also, let's consider a real growth rate to keep everything in today's dollars/terms.

What real growth rate would you assume for your planning?

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FiveK
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Re: What growth rate would you use?

Post by FiveK » Wed Feb 03, 2016 8:12 am

3%, hoping to be happily surprised.

Ask me tomorrow and I might say 2% or 5% or...?

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JonnyDVM
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Re: What growth rate would you use?

Post by JonnyDVM » Wed Feb 03, 2016 8:14 am

I use 5% (80/20)
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betterfinances
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Re: What growth rate would you use?

Post by betterfinances » Wed Feb 03, 2016 8:23 am

I am 100% stocks. I figure 8% growth rate. Then I recalculate by figuring in 3 - 4% interest. I suppose that's the same as 4% real growth, but I calculate differently.

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Re: What growth rate would you use?

Post by cmublitz » Wed Feb 03, 2016 8:28 am

90/10 with 6% growth and 3% inflation assumptions, so 3% real.

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Re: What growth rate would you use?

Post by Call_Me_Op » Wed Feb 03, 2016 8:31 am

I'm conservative, so assume -2% for SAFE money and a few percent for stocks.
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Re: What growth rate would you use?

Post by Bustoff » Wed Feb 03, 2016 8:34 am

I would be cautious using anything higher than 2%.

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Re: What growth rate would you use?

Post by B0bL0blawsLawBl0g » Wed Feb 03, 2016 8:34 am

I use 7% real return for stocks and 2% real return for bonds. So with a 50/50 portfolio, I'd estimate about 4.5% real return. For a 75/25 portfolio, I'd estimate about 6%.

In my opinion, it's senseless to argue about overly precise calibrations on 30-year estimates. Nobody has a crystal ball, so we can't see the future. And you'll have time to adjust your expectations/estimates over the course of 30 years as the market either outperforms or underperforms your initial estimates. By year 10, you'll have a better idea, by year 20 even better, etc. There is just no sense in fine-tuning your 30-year outlook beyond a certain level of precision.

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JonnyDVM
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Re: What growth rate would you use?

Post by JonnyDVM » Wed Feb 03, 2016 9:45 am

Call_Me_Op wrote:I'm conservative, so assume -2% for SAFE money and a few percent for stocks.
Is that -2% or +2% cuz -2% is a very boglehead answer.
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Re: What growth rate would you use?

Post by warner25 » Wed Feb 03, 2016 9:56 am

Planning on a static 60/40 portfolio, I'm thinking 2-3% based on some intuitive mix of historical data and current valuations. The problem, of course, is that a small % difference is enormous. When I plug in 5% (which isn't beyond of the realm of possibility), I project an order of magnitude more money left at age 70 after two decades of early retirement. I think the best I can do is keep in mind the full range between 0-5%, and just keep reassessing as I go along. But I'm pretty certain that folks (including all the pension fund managers) banking on 7-10% from a balanced portfolio are in big trouble.

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Re: What growth rate would you use?

Post by nisiprius » Wed Feb 03, 2016 10:00 am

I think 0% real for safe money is probably OK. I'm interpreting "safe money" to mean "an interest-earning account of some kind," not "physical paper currency." If you can't quite get 0% real for safe money, then you probably can for bonds, particularly since well over half of my bonds are explicitly inflation-indexed (TIPS and series I savings bonds).

According to an academic paper discussed here, a survey of 150 academic textbooks found stated values for "the equity risk premium" to range from 3% to 10%, so 3% seems like a conservative estimate.

If you add 3% equity risk premium on top of 0%, you get 3% real for stocks.

So, ballpark... 1% for a 1/3 stock portfolio, 2% for a 2/3 stock portfolio.

Remember, you need to use prudent pessimism in planning. It would be very dangerous to plan on getting the historic average return for stocks. So the prudent planning numbers are low, and those low numbers could credibly be something that could really could happen if you're unlucky. Just ordinary unlucky, not black-swan hit-by-meteor unlucky. While at the same time, there's a really darn good chance of getting a very worthwhile jackpot above the planning numbers.
Last edited by nisiprius on Fri Feb 05, 2016 7:33 am, edited 1 time in total.
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Re: What growth rate would you use?

Post by Snowjob » Wed Feb 03, 2016 10:24 am

I'm using 4% real returns for Equity (when I want to feel better, 3% if I want to be safe) and 0% for cash & bonds.

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Re: What growth rate would you use?

Post by betterfinances » Wed Feb 03, 2016 10:27 am

nisiprius wrote: Remember, you need to use prudent pessimism in planning. It would be very dangerous to plan on getting the historic average return for stocks.
I disagree. I have 26 years until I'll need retirement, and figure that the average performance for the next 26 years will probably be similar as the average performance for the last 26 years, so I figure my growth rate will be about the same as historic average return.

Since I don't need all of my retirement money the year that I retire, and will spread it out over (hopefully) 30 or 40 years, I might have up to 56 years of stock market performance in front of me. It's reasonable to think that the next 56 years will be on average as good as the last 56.

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Re: What growth rate would you use?

Post by Peter Foley » Wed Feb 03, 2016 10:29 am

I would use 2% to 3%. That is after inflation is taken into account. I used to use 4% but I think that is high given current interest rates. I agree with Snowjob regarding a 0% rate for cash and bonds. I-Bonds are an indicator of that low return.

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Re: What growth rate would you use?

Post by lvrpl » Wed Feb 03, 2016 10:33 am

B0bL0blawsLawBl0g wrote:I use 7% real return for stocks and 2% real return for bonds. So with a 50/50 portfolio, I'd estimate about 4.5% real return. For a 75/25 portfolio, I'd estimate about 6%.

In my opinion, it's senseless to argue about overly precise calibrations on 30-year estimates. Nobody has a crystal ball, so we can't see the future. And you'll have time to adjust your expectations/estimates over the course of 30 years as the market either outperforms or underperforms your initial estimates. By year 10, you'll have a better idea, by year 20 even better, etc. There is just no sense in fine-tuning your 30-year outlook beyond a certain level of precision.
I agree, but even from the responses so far it looks like even a group of savvy bogleheads uses rates that vary from 2% to 6% (real) for a 70/30 to 80/20-ish portfolio, and this gives wildly varying results over the course of a 30-year time horizon. It's helpful to see where my own assumption of 4% real lies on this spectrum to help inform if I'm being too optimistic.

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Re: What growth rate would you use?

Post by Boglegrappler » Wed Feb 03, 2016 10:33 am

I disagree. I have 26 years until I'll need retirement, and figure that the average performance for the next 26 years will probably be similar as the average performance for the last 26 years, so I figure my growth rate will be about the same as historic average return.
Younger people looking forward should certainly not use the post-1982 period as their baseline for measurement of anything. Beginning that year, the Fed relaxed the dam that had 15 or so years of impeded growth waiting behind it, and it contributed mightily to the results up through about 2007 or so.

No one knows what the future holds, but IMO calculations of appreciation above low to mid single digits (3-5% or so) are likely to lead to under savings. I'd be happy to be surprised about that, but I'm not expecting to.

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Re: What growth rate would you use?

Post by Quark » Wed Feb 03, 2016 10:35 am

I'd use 5% real for stocks (e/p for TSM) and 0.5% real for bonds (10 year TIPS). I'd realize there was an incredible amount of uncertainty associated with these guesses - you should use ranges instead of point estimates, such as plus or minus 10 percentage points for stocks, and then realize actual results may be outside that range.

e/p and current bond yields have been the most accurate methods, based on what I've read, but even they have not been all that accurate.

Consider the consequences of being wrong in your estimates.
Last edited by Quark on Wed Feb 03, 2016 10:37 am, edited 1 time in total.

lvrpl
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Re: What growth rate would you use?

Post by lvrpl » Wed Feb 03, 2016 10:36 am

Boglegrappler wrote:
Younger people looking forward should certainly not use the post-1982 period as their baseline for measurement of anything. Beginning that year, the Fed relaxed the dam that had 15 or so years of impeded growth waiting behind it, and it contributed mightily to the results up through about 2007 or so.

No one knows what the future holds, but IMO calculations of appreciation above low to mid single digits (3-5% or so) are likely to lead to under savings. I'd be happy to be surprised about that, but I'm not expecting to.
I assume you mean 3%-5% real, not nominal, correct?

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Re: What growth rate would you use?

Post by TheTimeLord » Wed Feb 03, 2016 10:40 am

over 30 years if I throw a dart I hit 4% and hope for 5% or 6% if you stay equity heavy. If you want to be conservative use 3%. A lot of it will depend on your luck in being able to make contributions during large market pullbacks instead of having to burn through your emergency fund and the timing of those pullbacks in your investing life. Of course you are asking people to answer the unanswerable.
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Re: What growth rate would you use?

Post by Boglegrappler » Wed Feb 03, 2016 10:44 am

I assume you mean 3%-5% real, not nominal, correct?
I did, but consider that real and nominal are converging rapidly. There could arise a period where nominal is below real, and not above it, and that is heavily on my mind.

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Phineas J. Whoopee
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Re: What growth rate would you use?

Post by Phineas J. Whoopee » Thu Feb 04, 2016 11:13 pm

Would I? I dunno.

Do I? Zero.

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Re: What growth rate would you use?

Post by saltycaper » Fri Feb 05, 2016 2:53 am

I would not use a specific rate. I would plan on a variety of outcomes being possible depending on different rates. I would then admit to myself that despite my best attempt to choose logical rates of growth, I really have not the slightest idea what my assets will be worth at any future point in time. The factors to consider for investment performance alone are intimidating, let alone the breadth of events that may impact one's financial situation.
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Re: What growth rate would you use?

Post by SQRT » Fri Feb 05, 2016 3:34 am

saltycaper wrote:I would not use a specific rate. I would plan on a variety of outcomes being possible depending on different rates. I would then admit to myself that despite my best attempt to choose logical rates of growth, I really have not the slightest idea what my assets will be worth at any future point in time. The factors to consider for investment performance alone are intimidating, let alone the breadth of events that may impact one's financial situation.
Yes, I agree. Just save as much as you can. FI will come sooner or later depending on your savings rate and market performance. Once you are FI you can decide when you want to retire. Sure, you can play with some growth projections, but I wouldn't set my retirement date or savings rate based on them.

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Re: What growth rate would you use?

Post by avenger » Fri Feb 05, 2016 5:42 am

I use 3% real for my 75/25 portfolio. But who the heck knows. The only reason I speculate a return is because investment calculators require you put something in.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

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tarheel
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Re: What growth rate would you use?

Post by tarheel » Fri Feb 05, 2016 6:24 am

Rick's 30-year projections would be a good place to start:

http://portfoliosolutions.com/latest-le ... ecast-2015

I don't think the 2016 version is out yet, but should be much different.

closetoreality
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Re: What growth rate would you use?

Post by closetoreality » Fri Feb 05, 2016 6:34 am

Little worried about my annual return. VASGX is pulling a negative return for the past 3 years.

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Re: What growth rate would you use?

Post by ge1 » Fri Feb 05, 2016 6:40 am

betterfinances wrote:
nisiprius wrote: Remember, you need to use prudent pessimism in planning. It would be very dangerous to plan on getting the historic average return for stocks.
I disagree. I have 26 years until I'll need retirement, and figure that the average performance for the next 26 years will probably be similar as the average performance for the last 26 years, so I figure my growth rate will be about the same as historic average return.

Since I don't need all of my retirement money the year that I retire, and will spread it out over (hopefully) 30 or 40 years, I might have up to 56 years of stock market performance in front of me. It's reasonable to think that the next 56 years will be on average as good as the last 56.
I think that's a dangerous assumption. If you use the gordon equation (dividend yield plus real dividend growth) I get to around 3.5% for US stocks and currently a bit more for international, so maybe 4% for a diversified portfolio. With rates where they are the real return for bond is 0%. So depending on our mix of stocks and bonds you should be somewhere between 0% - 4%.

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Re: What growth rate would you use?

Post by Toons » Fri Feb 05, 2016 6:44 am

60/40 Portfolio
Next 10yrs
4.3% :happy .
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Re: What growth rate would you use?

Post by Carl53 » Fri Feb 05, 2016 7:30 am

I've used 2% real for projections, but for the last six years have a compounded 4.3% real attained. Last year was -1.6%.

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Re: What growth rate would you use?

Post by UADM » Fri Feb 05, 2016 8:06 am

betterfinances wrote:
nisiprius wrote: Remember, you need to use prudent pessimism in planning. It would be very dangerous to plan on getting the historic average return for stocks.
I disagree. I have 26 years until I'll need retirement, and figure that the average performance for the next 26 years will probably be similar as the average performance for the last 26 years, so I figure my growth rate will be about the same as historic average return.

Since I don't need all of my retirement money the year that I retire, and will spread it out over (hopefully) 30 or 40 years, I might have up to 56 years of stock market performance in front of me. It's reasonable to think that the next 56 years will be on average as good as the last 56.
That is a dangerous assumption. The 2 biggest stock market runs in history were in the past 20 years. There is a reason they say that past performance is not indicative of future.

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Re: What growth rate would you use?

Post by carolinaman » Fri Feb 05, 2016 9:03 am

I would assume 4% real for equity and 1% real for fixed income. Therefore a 75/25 portfolio real return should be 3.25%. That may be a little conservative. However, considering many of the forecasters believe returns over the next 10 years will be lower than historical averages, this may make this a good guess.

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Re: What growth rate would you use?

Post by nisiprius » Fri Feb 05, 2016 9:12 am

betterfinances wrote:
nisiprius wrote:Remember, you need to use prudent pessimism in planning. It would be very dangerous to plan on getting the historic average return for stocks.
I disagree. I have 26 years until I'll need retirement, and figure that the average performance for the next 26 years will probably be similar as the average performance for the last 26 years, so I figure my growth rate will be about the same as historic average return...
I don't think we do disagree, because there's a big difference between saying "the average performance for the next 26 years will probably be similar to the average performance for the next 26 years" and saying "I am relying on that."

Anyway, with a little spreadsheet work I was able to look at what actually happened. You decide whether it meets the criterion of "next 26 years has always been 'similar' to previous 26 years."

For the sake of argument, my graph captions pretend that someone is using the last 26 years to predict or plan the return for the next 26 years. Among the 39 years for which I have data for 26 years before and after, I found:
  • 15 cases of a "2X shortfall"--the total cumulative real growth of the next 26 years was less than half that of the previous 26
  • 10 cases of a "2X jackpot"--the total cumulative real growth of the next 26 years was double or more that of the previous 26
  • 14 cases when the total cumulative real growth of the next 26 years was in the range "between half and double" that of the previous 26.
Thus, if "similar" means "within a factor of 2 of expected, either way" the return was "similar" less than 36% of the time!

In looking at these charts we alway are confronted with the problem that there are only a few independent, non-overlapping 26-year periods in the data range 1926-2015. And, yes, the problem is considerably mitigated if you assume steady annual contributions (difficult for most salaried workers to do during 1929-1944). (However, it is probably exacerbated, not mitigated, by steady withdrawals because of the "sequence-of-returns" problem).

Image

We see that throughout the 1950 and 1960s, if we treated the "past 26 years" as a prediction of the "next 26 years," we would have been consistently overoptimistic, by as much as 4%, 5% annualized. Serious. Throughout the late 1970s and 1980s, we would have been consistently pessimistic, with actual returns averaging 2%, 3% higher than in the previous 26.

From a planning point of view, it is useful to look at this in terms of growth of $10,000. And again, in general... looking at cumulative growth over long periods of time makes things look big while looking an annualized annual growth makes things look small, so we just have to keep a clear head... I'm not intentionally putting "spin" on this.

Image

1) The "best" year was 1981. At year-end 1981, we had seen $10,000 growing to only $20,567 in the previous 26 years. During the next 26 it grew to $108,710. Actual results were 5 times better than expected.

2) The "worst" year was 1958. At year-end 1958, we had seen $10,000 growing to $145,065 over the previous 26 years. But it only grew to $22,948 over the next 26 years. Actual results were less than 1/5 what was expected.

3) During the 39 years for which there are 26 years of data before and after year end, there were:
--15 cases of a "2X shortfall"--the total real return of the next 26 years was less than half that of the previous 26
--10 cases of a "2X jackpot"--the total real return of the next 26 years was double or more that of the previous 26
--14 cases when the total return of the next 26 years was in the range "between half and double" that of the previous 26.
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Re: What growth rate would you use?

Post by B0bL0blawsLawBl0g » Fri Feb 05, 2016 10:03 am

I appreciate that folks like to be conservative and err on the side of pessimism. That's smart. However, I think that a few people are overstating the case when they say using historical returns for a 30-year projection is "dangerous."

The fact is, a 30-year projection is not dangerous as long as you recognize it for what it is: your best guess of where things will end up in 30 years. It's not a worst-case-scenario, and it's certainly not a bulletproof plan. Nobody (hopefully) is making drastic decisions based on any 30-year projection, conservative or not.

Over time, everyone will of course see how reality matches up against their initial projection and will have plenty of time -- 30 years! -- to make adjustments if the market underperforms. With that in mind, it's perfectly reasonable and prudent to use historical returns for your 30-year projection, as long as you're aware that reality has a habit of not perfectly conforming with your plan, and you will have to make periodic adjustments to any plan.

Really, far more important than any individual plan (and especially a plan with a 30-year time horizon) is the process of making the plan and the thought and consideration that goes into it. What Eisenhower said about battle also applies to financial planning: "I have always found that plans are useless, but planning is indispensable."

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Re: What growth rate would you use?

Post by fmzip » Fri Feb 05, 2016 10:20 am

I'm using 0% return for the next 10 years with a 60/40 portfolio, that will get me to retirement at 60. If it goes negative, guess I will have a choice to work longer or retire and cut back a little. Either way, I won't ever be impoverished!

Save as much as you can, while still enjoying life, and see where things end up. I'm not sure how one can really "adjust" if you are applying your best effort already. Yes you should adjust your risk as you age but the end result will be what it will be regardless of adjusting along the way. If you are 10 years in with zero return, are you really going to give up living life and start saving every red cent or taking on even more risk for needed gains? In my opinion, it's not realistic for most and likely foolish.

To answer your question, I'd use 3%....

As past performance never guarantees future performance, good luck in guessing.

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Re: What growth rate would you use?

Post by crynwr » Fri Feb 05, 2016 10:51 am

nisiprius wrote:...

From a planning point of view, it is useful to look at this in terms of growth of $10,000. And again, in general... looking at cumulative growth over long periods of time makes things look big while looking an annualized annual growth makes things look small, so we just have to keep a clear head... I'm not intentionally putting "spin" on this.

Image

...
3) During the 39 years for which there are 26 years of data before and after year end, there were:
--15 cases of a "2X shortfall"--the total real return of the next 26 years was less than half that of the previous 26
--10 cases of a "2X jackpot"--the total real return of the next 26 years was double or more that of the previous 26
--14 cases when the total return of the next 26 years was in the range "between half and double" that of the previous 26.
Very thought-provoking post. In the chart above, it really strikes me how vacant the area around x=y is. Mostly, the past's past was not much like the past's future! Which gets me wondering why one would expect anything else. Which in turn gets me thinking back to 1990 and thinking about what could, and what could not, have been predicted with any confidence about the world in general of 2016 from that vantage point and what confident projections would have been wildly off. Asimov envisioned a distant future that still had punch tape and slide rules. We are almost bound to do analogous things in our predictions.

Cheers,
Cryn
Oh yes, I've learned from my mistakes, and I'm sure I can repeat them exactly -- Sir Arthur Streeb-Greebling

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Re: What growth rate would you use?

Post by B0bL0blawsLawBl0g » Fri Feb 05, 2016 10:58 am

fmzip wrote:I'm not sure how one can really "adjust" if you are applying your best effort already.
The likely areas for potential adjustments are (1) retiring later (ie, working longer), (2) reducing expenses (ie, adjusting to a lower-consumption lifestyle), or (3) increasing income.

We are talking about someone just setting out and making a 30-year projection in the early stages of their career (this was the OP to which everyone is supposedly responding). Of course there are a multitude of adjustments someone could realistically make during that 30-year period.

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Re: What growth rate would you use?

Post by fmzip » Fri Feb 05, 2016 11:04 am

B0bL0blawsLawBl0g wrote:
fmzip wrote:I'm not sure how one can really "adjust" if you are applying your best effort already.
The likely areas for potential adjustments are (1) retiring later (ie, working longer), (2) reducing expenses (ie, adjusting to a lower-consumption lifestyle), or (3) increasing income.
As I said, I'm not sure how one can really "adjust" if you are applying your best effort already. Your suggestions are best effort suggestions as I intimated. Work more, adjust lifestyle, you do that it the first place, that's the best effort which is all you can ever do. Do it from day one, you never should have to adjust as you are already adjusted. Your plan is in place, you stick with the plan. It's an all encompassing balancing act from day one, one that you can live with indefinitely. You will end up with what you end up with.

The "number" means nothing, the approach to living life in balance which works for you is everything.
Last edited by fmzip on Fri Feb 05, 2016 11:08 am, edited 1 time in total.

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Re: What growth rate would you use?

Post by B0bL0blawsLawBl0g » Fri Feb 05, 2016 11:08 am

fmzip wrote:
B0bL0blawsLawBl0g wrote:
fmzip wrote:I'm not sure how one can really "adjust" if you are applying your best effort already.
The likely areas for potential adjustments are (1) retiring later (ie, working longer), (2) reducing expenses (ie, adjusting to a lower-consumption lifestyle), or (3) increasing income.
As I said, I'm not sure how one can really "adjust" if you are applying your best effort already. Your suggestions are best effort suggestions as I intimated. Work more, adjust lifestyle, you do that it the first place, that's the best effort which is all you can ever do. Do it from day one, you never should have to adjust as you are already adjusted. Your plan is in place, you stick with the plan. It's an all encompassing balancing act from day one, one that you can live with indefinitely. You will end up with what you end up with.
Most people aren't living life at 100% maximum effort and there are almost always tradeoffs that can be made (ie, spend less on X) or improvements that can be made (ie, work until 67 instead of 65). But you're right, for someone that is living life with 100% maximum effort and efficiency, planning becomes fatalistic. That's just not the situation most people are in.

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Re: What growth rate would you use?

Post by fmzip » Fri Feb 05, 2016 11:09 am

^^^ Totally agree. To me it's 100% satisfaction. You're happy with your plan, your happy with what you have and you are willing to accept the end result based on your decision of how you decide to live life. If there was more discussion on that versus chasing returns, most would likely end up living happily ever after.

I'm starting to sound wise, turning 50 this year. Wish I had this mind set in my 30's which is what I am suggesting to the OP. I'd have more, not meaning material things either ;)

Carson
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Re: What growth rate would you use?

Post by Carson » Fri Feb 05, 2016 5:45 pm

I use 4% for our investments growth and 3% for our household non-mortgage expenses growth.
30-something personal finance enthusiast, just get getting started on this whole portfolio thing.

SamB
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Re: What growth rate would you use?

Post by SamB » Fri Feb 05, 2016 7:34 pm

My growth rate since 1989 has been slightly more than 8 percent. However, I am a lot more pessimistic now than I was in 1989, and I use 6% for an 80/20 portfolio. I just cannot see stocks march ahead at 8% nominal with GDP at 2% or less. There would have to be wholesale changes in the US economy, institutional change, technology, etc. And as far as technology is concerned I am very underwhelmed. The biggest changes occurred at the end of the 19th and beginning of the 20th century. What is happening now is not of that magnitude. However, it could change of course, but I certainly cannot predict it.

The only way I could justify 8% is if, I was aware that stocks have not done much of anything in 15 years, and I could not be bothered by the history before that. Sometimes ignorance can be an advantage. I sure knew very little when I bought my first stock in 1978.

KlangFool
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Re: What growth rate would you use?

Post by KlangFool » Fri Feb 05, 2016 7:52 pm

OP,

My plan is based on 0% real return. I have a 64/36 portfolio.

KlangFool

Hecdias
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Re: What growth rate would you use?

Post by Hecdias » Fri Feb 05, 2016 8:05 pm

Hi,

Brand new here - I usually take 1 percentage point off of this: http://www.thornburg.com/pdf/TH1401_rea ... eturns.pdf

So 5.38% for S&P 500, 4.56% for Russell 2000, etc...

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JonnyDVM
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Re: What growth rate would you use?

Post by JonnyDVM » Sat Feb 06, 2016 8:56 am

Some of you guys really go out of your way to make everyone depressed about the future. If you're using 0% as the projected gain on your portfolio why wouldn't you just put all your money in TIPS and save yourself some heartache and stress for a decade :confused

Also, saying it's impossible to predict anything quite frankly isn't very helpful either. It's not impossible to make an educated guess. Some of us are trying to figure out how much we could have in 20 years given a certain savings rate. The goal is to try to get close to the projected amount we are wanting to retire comfortably at a certain age. Based on historic data one can project real returns for the next 20 years on a balanced portfolio at somewhere between 3% (conservative estimate) and 6% (aggressive estimate) with some degree of confidence. I've read such projections many times from different sources way smarter than I am. Being a sad sack and telling OP 0% real is about as helpful as a financial advisor saying 10% returns are expected. Both are not reasonable projections.
Last edited by JonnyDVM on Sat Feb 06, 2016 9:08 am, edited 1 time in total.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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obgyn65
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Re: What growth rate would you use?

Post by obgyn65 » Sat Feb 06, 2016 9:05 am

I use 2.9%.
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell

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just frank
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Re: What growth rate would you use?

Post by just frank » Sat Feb 06, 2016 9:14 am

I do three projections: 3, 5 and 8.

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papiper
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Re: What growth rate would you use?

Post by papiper » Sat Feb 06, 2016 9:38 am

If most of these projections were made to a business by consultants, you would be fired. What I want in my planning is a realistic average and have a contingency plan for the worst and then adjust as time moves on. For me I use 8% over 10 years (5% net) and 0% as the contingency.

And I'm 90/10 stocks/bonds in my investments, but I'm lucky enough for to have a pension that covers most of my expenses. So if I counted that and future social security as investments, I'm probably 60/40. Has worked so far. I'll admit having a pension and no debt lets me invest more, but I don't buy into fear of losing.

I really don't get why people are so focused on losing that they give up the potential of winning - when winning almost always happened over time. I'm blessed that I have "won the game", but I will keep playing, because the deck is so loaded in winning. And yes, I never sold when stocks went down and I know what it felt like. Not that bad because the future will come.
Last edited by papiper on Sat Feb 06, 2016 9:45 am, edited 1 time in total.

UADM
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Re: What growth rate would you use?

Post by UADM » Sat Feb 06, 2016 9:41 am

May I ask.. why make up a growth rate at all? There is no way to predict the future. Save the best you can and see how things turn out. I don't understand the point of using a made up metric to predict the future. What am I missing?

Quark
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Re: What growth rate would you use?

Post by Quark » Sat Feb 06, 2016 9:57 am

The research I've seen finds that e/p is a better predictor than past stock returns. For example, here's a Vanguard paper that looks at 10 year periods: https://personal.vanguard.com/pdf/s338.pdf

Returns can increase due to p/e increases or earnings increases (dividends tend to be paid from earnings). To the extent increased returns are due to increased p/e, this likely suggests a decrease in future returns.

There's a tremendous amount of uncertainty in any forecast method.

Quark
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Re: What growth rate would you use?

Post by Quark » Sat Feb 06, 2016 10:02 am

UADM wrote:May I ask.. why make up a growth rate at all? There is no way to predict the future. Save the best you can and see how things turn out. I don't understand the point of using a made up metric to predict the future. What am I missing?
Your savings rate could be very different at a 0% rate of return than a 10% return.

You also need to guess at a withdrawal rate. How else would you know when you've saved enough or how much you can spend?

How do you decide on an asset allocation without some notion of the trade-offs inherent in choosing stocks v. bonds.

One answer is to follow rules of thumb - allocate 60/40 or age in bonds, save 20% of income, assume a 3%-4% withdrawal rate.

The risk of a pure "see how things turn out" approach is that you find yourself old with inadequate savings.

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