Rate to project out savings

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Incendiary
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Rate to project out savings

Post by Incendiary » Sun Jan 29, 2017 10:31 pm

What rate do you use to project out future retirement savings?

I'm about 35 years away from "retirement." (I don't think I will ever retire, hence the " ".) I would think we should use real, not nominal, and I've been using 3% real. So, if I want to have, say, $100k gross annual income during retirement, and I want to see if I'm on track, then should I take my investment account totals now and multiply out by 1.03 each year, add in expected annual savings, and do that another 34 times to see if it gets to the same or greater than the number I want with the SWR I would use?

Also, assuming you plan for a pretax gross annual income, then how do you account for traditional/pre-tax vs Roth/post-tax investment accounts? Do you project them out separately and use a lower SWR for pre and a higher SWR equivalent for post?

sport
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Re: Rate to project out savings

Post by sport » Mon Jan 30, 2017 12:42 am

I retired 12 years ago. 5 years before I retired, I generated a detailed spreadsheet. It included an expected rate of inflation, investment results in taxable, 401K, TIRA and Roth IRA. It included current investments and allowed for additional investing during the 5 years prior to retirement. I wanted to project my cash needs during retirement and make sure my planned retirement would work for us. It all looked very good and well thought out.

Now reality:
Inflation dropped substantially: good
Interest rates dropped substantially: not so good
We had large unplanned expenditures; DW got married; we bought a new house: bad
We had an unexpected increase in income and pension: very good

So, detailed planning, even though it was only 5 years prior to retirement, was really not worth very much. It was interesting, and the plusses mostly zeroed out the minuses. In the end, it turned out to be reasonably accurate. However, much of that was just luck. So, my advice is to continue your planning. However, you should revisit your plan at least every 5 years. Life happens, and events will occur that you could never predict. Most likely, your plan will change substantially as you move towards retirement.

Nate79
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Re: Rate to project out savings

Post by Nate79 » Mon Jan 30, 2017 12:52 am

Incendiary wrote:What rate do you use to project out future retirement savings?

I'm about 35 years away from "retirement." (I don't think I will ever retire, hence the " ".) I would think we should use real, not nominal, and I've been using 3% real. So, if I want to have, say, $100k gross annual income during retirement, and I want to see if I'm on track, then should I take my investment account totals now and multiply out by 1.03 each year, add in expected annual savings, and do that another 34 times to see if it gets to the same or greater than the number I want with the SWR I would use?

Also, assuming you plan for a pretax gross annual income, then how do you account for traditional/pre-tax vs Roth/post-tax investment accounts? Do you project them out separately and use a lower SWR for pre and a higher SWR equivalent for post?
I have started doing these projections also 20+ years from retirement to get a feel for what the accounts will look like and if we will reach our goals. I do all the calculations in real dollars and use 3-4% real. I project each account type separately to also get a feel for our potential tax situation.

If you are handy with Excel/Sheets you can easily do the calculation with the future value function.

Dottie57
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Re: Rate to project out savings

Post by Dottie57 » Mon Jan 30, 2017 12:57 am

I don't think it is possible to accurately plan that far in advance. The two things you need to do:

1. Save at least 15% of your income.
2. Live below your means so that you don't have a large amount of debt. Everything you spend on is in play and includes housing, cars, clothing , vacations, entertainment etc. Control your spending, don't let it control you.

Carson
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Re: Rate to project out savings

Post by Carson » Mon Jan 30, 2017 10:44 am

Incendiary wrote:What rate do you use to project out future retirement savings?
I do it in excel with a column for each year starting now going until the money runs out. :beer

Rows going down are our various retirement accounts and expenses so it looks like this:
Her 401k
beginning balance
+ additions (subtractions in later years)
% growth (3% now, 1% in later years)
ending balance

His 457
Her ROTH
His ROTH
Annual average non-mortgage expenses (I think this is the core of what you are asking - I have our average expenses now and 3% increase each year going forward)
Annual healthcare estimate in applicable years
Annual travel estimate in applicable years
30-something personal finance enthusiast, just get getting started on this whole portfolio thing.

ved
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Re: Rate to project out savings

Post by ved » Mon Jan 30, 2017 11:03 am

sport wrote:I retired 12 years ago. 5 years before I retired, I generated a detailed spreadsheet. It included an expected rate of inflation, investment results in taxable, 401K, TIRA and Roth IRA. It included current investments and allowed for additional investing during the 5 years prior to retirement. I wanted to project my cash needs during retirement and make sure my planned retirement would work for us. It all looked very good and well thought out.

Now reality:
Inflation dropped substantially: good
Interest rates dropped substantially: not so good
We had large unplanned expenditures; DW got married; we bought a new house: bad
We had an unexpected increase in income and pension: very good

So, detailed planning, even though it was only 5 years prior to retirement, was really not worth very much. It was interesting, and the plusses mostly zeroed out the minuses. In the end, it turned out to be reasonably accurate. However, much of that was just luck. So, my advice is to continue your planning. However, you should revisit your plan at least every 5 years. Life happens, and events will occur that you could never predict. Most likely, your plan will change substantially as you move towards retirement.
Wife got married?
:shock:
:D

Rodc
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Re: Rate to project out savings

Post by Rodc » Mon Jan 30, 2017 11:21 am

3% real is fine. This is not a particularly accurate exercise no matter what you do.

I suggest you also look at something lower and higher. Say 1% and 5%. If 1% is a complete fail you are at some modest risk, so would want to at least consider increasing savings. If you get lucky and have really solid returns you could see what might be a possible early retirement date.

Another huge unknown this far out is what expenses you might need to cover and what discretionary expenses you might want to cover.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

dziuniek
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Re: Rate to project out savings

Post by dziuniek » Mon Jan 30, 2017 11:37 am

ved wrote:
sport wrote:I retired 12 years ago. 5 years before I retired, I generated a detailed spreadsheet. It included an expected rate of inflation, investment results in taxable, 401K, TIRA and Roth IRA. It included current investments and allowed for additional investing during the 5 years prior to retirement. I wanted to project my cash needs during retirement and make sure my planned retirement would work for us. It all looked very good and well thought out.

Now reality:
Inflation dropped substantially: good
Interest rates dropped substantially: not so good
We had large unplanned expenditures; DW got married; we bought a new house: bad
We had an unexpected increase in income and pension: very good

So, detailed planning, even though it was only 5 years prior to retirement, was really not worth very much. It was interesting, and the plusses mostly zeroed out the minuses. In the end, it turned out to be reasonably accurate. However, much of that was just luck. So, my advice is to continue your planning. However, you should revisit your plan at least every 5 years. Life happens, and events will occur that you could never predict. Most likely, your plan will change substantially as you move towards retirement.
Wife got married?
:shock:
:D
I would categorize that as a large unplanned expenditure as well :twisted:

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obafgkm
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Re: Rate to project out savings

Post by obafgkm » Mon Jan 30, 2017 11:37 am

sport wrote: DW got married
Who got married?

Edited: Ah, I see two others beat me to it.

Grt2bOutdoors
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Re: Rate to project out savings

Post by Grt2bOutdoors » Mon Jan 30, 2017 1:12 pm

Dottie57 wrote:I don't think it is possible to accurately plan that far in advance. The two things you need to do:

1. Save at least 15% of your income.
2. Live below your means so that you don't have a large amount of debt. Everything you spend on is in play and includes housing, cars, clothing , vacations, entertainment etc. Control your spending, don't let it control you.
+1
I use 1% real as middle of road calculation, 0% as worse case scenario and 2% real as optimistic. I'd go with the middle of road calculation as base case.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

sport
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Re: Rate to project out savings

Post by sport » Mon Jan 30, 2017 2:45 pm

DD got married. :oops: Thanks for the correction.

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willthrill81
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Re: Rate to project out savings

Post by willthrill81 » Mon Jan 30, 2017 4:08 pm

Incendiary wrote:What rate do you use to project out future retirement savings?

I'm about 35 years away from "retirement." (I don't think I will ever retire, hence the " ".) I would think we should use real, not nominal, and I've been using 3% real. So, if I want to have, say, $100k gross annual income during retirement, and I want to see if I'm on track, then should I take my investment account totals now and multiply out by 1.03 each year, add in expected annual savings, and do that another 34 times to see if it gets to the same or greater than the number I want with the SWR I would use?

Also, assuming you plan for a pretax gross annual income, then how do you account for traditional/pre-tax vs Roth/post-tax investment accounts? Do you project them out separately and use a lower SWR for pre and a higher SWR equivalent for post?
Keep in mind that over that long of a time frame, you're swinging an axe rather than using a scalpel. The estimates are 'rough and dirty' and should only be treated as big-picture planning tools. That being said, I think that there's real value in it.

First of all, I think you should take a look at this easy calculator. It shows you how long it will take, starting from wherever you are, to retire at a given savings rate, real rate of return (after inflation), and withdrawal rate. For instance, with a 5% real return, a 4% withdrawal rate, and 15% savings rate (starting with nothing), you can retire in about 30 years.
https://networthify.com/calculator/earl ... awalRate=4

With a low savings rate (<20%), the rate of return has the biggest impact on the length of time it will take (with higher savings rate, the rate of return loses some of its importance). I'm honestly shocked to see several people in this thread recommend using a 2% rate of return. That's a very, very conservative figure, especially for a well diversified portfolio over a 35 year period, and if you did only achieve a 2% real rate of return, it would take a very long time for all but the best savers to have a successful retirement. Considering that a 100% U.S. equity portfolio returned almost 7% after inflation over the last 145 years, I think that a higher number can be used. You might not feel comfortable with a 100% equity portfolio, but you should probably be at least 70% stocks given that long of a time frame. Personally, I use 5% as my baseline since I'm 100% in equities and in asset classes that have historically outperformed the S&P 500 over the long-term. If you use this investment calculator, you can input a range of returns to graphically see the outcome. You can do the same with the above calculator as well.
https://www.investor.gov/additional-res ... calculator

Personally, I think that anyone who is genuinely concerned about saving for retirement should be saving at least 20% of their gross income. It takes sacrifice to get there, but it can be done. Many people, including myself, have significantly higher savings rates. Starting from a zero portfolio, a 5% return will result in financial independence after just 17 years with a 50% savings rate.

Let's take a look at your goal of $100k (gross?) income per year in retirement. Ignoring SS for the moment, if you used a 4% withdrawal rate, that means you would need a $2.5M portfolio ($100k/.04), more if you want $100 net of taxes. And that's $2.5M in today's money; it will be considerably more actual dollars than that 35 years from now. If you started with nothing in your portfolio and achieved a 5% real return, you would need to save $2,400 per month to achieve that; a 3% return would require about $3,500 per month; a 7% return would require about $1,500 per month. Obviously, the more you start with, the less you'll need to save each month.

Regarding the traditional vs. Roth debate, that's a whole other can of worms, but suffice it to say that the overwhelming majority of folks are better served with a traditional IRA. If you become a prodigious saver, then you may want to consider making some Roth contributions further down the line, especially when you have a better grasp of the math involved in determining which is preferable when.

At this point, I would fine telling you to save until it hurts, then find ways to save even more. When you get a little further down the road, carefully evaluate your progress and determine what changes (there will certainly be some) you'll need to make to stay on track.
“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

KlangFool
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Re: Rate to project out savings

Post by KlangFool » Mon Jan 30, 2017 5:02 pm

willthrill81 wrote:
With a low savings rate (<20%), the rate of return has the biggest impact on the length of time it will take (with higher savings rate, the rate of return loses some of its importance). I'm honestly shocked to see several people in this thread recommend using a 2% rate of return. That's a very, very conservative figure, especially for a well diversified portfolio over a 35 year period,
willthrill81,

You are shocked that people use 2% rate of return. But, you are not shocked that people assume they will be fully employed for 35 years? IMHO, that is not realistic for many people.

KlangFool

Dantes
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Re: Rate to project out savings

Post by Dantes » Mon Jan 30, 2017 5:28 pm

What you are doing is perfectly reasonable, with all the caveats noted by others. Personally I use 2% for a real return; the average annual return for a 60/40 portfolio is 7.4% according to Vanguard. I don't know the average inflation over the same time span, but one site, at least, says the average inflation since 1913 is 3.22%.

Regardless, its a planning tool and of course will be off. So each year I update the beginning account balances with the real balance as of the start of the year; I don't really believe that I am accurately predicting my account balances in 2040, but its the best I can do.

Nate79
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Re: Rate to project out savings

Post by Nate79 » Mon Jan 30, 2017 9:02 pm

Grt2bOutdoors wrote:
Dottie57 wrote:I don't think it is possible to accurately plan that far in advance. The two things you need to do:

1. Save at least 15% of your income.
2. Live below your means so that you don't have a large amount of debt. Everything you spend on is in play and includes housing, cars, clothing , vacations, entertainment etc. Control your spending, don't let it control you.
+1
I use 1% real as middle of road calculation, 0% as worse case scenario and 2% real as optimistic. I'd go with the middle of road calculation as base case.
2% real is optimism? For stocks? Over 30+ years?

We are in real trouble if any of the pessimistic assumptions on the site ever come true.

Rodc
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Re: Rate to project out savings

Post by Rodc » Tue Jan 31, 2017 6:51 am

sport wrote:DD got married. :oops: Thanks for the correction.
Well, she is someone's DW!
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Rodc
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Re: Rate to project out savings

Post by Rodc » Tue Jan 31, 2017 6:54 am

Nate79 wrote:
Grt2bOutdoors wrote:
Dottie57 wrote:I don't think it is possible to accurately plan that far in advance. The two things you need to do:

1. Save at least 15% of your income.
2. Live below your means so that you don't have a large amount of debt. Everything you spend on is in play and includes housing, cars, clothing , vacations, entertainment etc. Control your spending, don't let it control you.
+1
I use 1% real as middle of road calculation, 0% as worse case scenario and 2% real as optimistic. I'd go with the middle of road calculation as base case.
2% real is optimism? For stocks? Over 30+ years?

We are in real trouble if any of the pessimistic assumptions on the site ever come true.
Wouldn't that be a pretty good definition of pessimistic? :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

The Wizard
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Re: Rate to project out savings

Post by The Wizard » Tue Jan 31, 2017 7:09 am

Dottie57 wrote:I don't think it is possible to accurately plan that far in advance. The two things you need to do:

1. Save at least 15% of your income.
2. Live below your means so that you don't have a large amount of debt. Everything you spend on is in play and includes housing, cars, clothing , vacations, entertainment etc. Control your spending, don't let it control you.
This is correct.
Focus on increasing your savings/investment rate in your younger years. You should be able to get close to 30% in later working years after all debts, including mortgage, are paid off...
Attempted new signature...

Grt2bOutdoors
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Re: Rate to project out savings

Post by Grt2bOutdoors » Tue Jan 31, 2017 9:12 am

Rodc wrote:
Nate79 wrote:
Grt2bOutdoors wrote:
Dottie57 wrote:I don't think it is possible to accurately plan that far in advance. The two things you need to do:

1. Save at least 15% of your income.
2. Live below your means so that you don't have a large amount of debt. Everything you spend on is in play and includes housing, cars, clothing , vacations, entertainment etc. Control your spending, don't let it control you.
+1
I use 1% real as middle of road calculation, 0% as worse case scenario and 2% real as optimistic. I'd go with the middle of road calculation as base case.
2% real is optimism? For stocks? Over 30+ years?

We are in real trouble if any of the pessimistic assumptions on the site ever come true.
Wouldn't that be a pretty good definition of pessimistic? :)
Well, expectations are that long term returns will be below par going forward due to high price to earnings, higher price to book, slowing economic growth globally, potentially higher inflation - all the names we respect and follow are saying it - expect lower returns going forward. If you believe inflation is 2% in the long-run and experts (the ones we follow, not the shills on CNBC) are saying 5% for equities, you have 3% real. If you believe 3% inflation, and experts are saying 5% returns, you now have 2% real - and that is being optimistic. There is article in todays WSJ in the bank of the B section that talks about pricing pressures - cost inflation is showing up but producers are having a difficult time passing it on to end-user, that leads to compressed profit margins, lower profits translate into muted gains and/or price deflation in the equity markets. Not saying that is happening now, but that one should not discount that we could be in for choppy seas down the road.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Rodc
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Re: Rate to project out savings

Post by Rodc » Tue Jan 31, 2017 10:42 am

Grt2bOutdoors wrote:
Rodc wrote:
Nate79 wrote:
Grt2bOutdoors wrote:
Dottie57 wrote:I don't think it is possible to accurately plan that far in advance. The two things you need to do:

1. Save at least 15% of your income.
2. Live below your means so that you don't have a large amount of debt. Everything you spend on is in play and includes housing, cars, clothing , vacations, entertainment etc. Control your spending, don't let it control you.
+1
I use 1% real as middle of road calculation, 0% as worse case scenario and 2% real as optimistic. I'd go with the middle of road calculation as base case.
2% real is optimism? For stocks? Over 30+ years?

We are in real trouble if any of the pessimistic assumptions on the site ever come true.
Wouldn't that be a pretty good definition of pessimistic? :)
Well, expectations are that long term returns will be below par going forward due to high price to earnings, higher price to book, slowing economic growth globally, potentially higher inflation - all the names we respect and follow are saying it - expect lower returns going forward. If you believe inflation is 2% in the long-run and experts (the ones we follow, not the shills on CNBC) are saying 5% for equities, you have 3% real. If you believe 3% inflation, and experts are saying 5% returns, you now have 2% real - and that is being optimistic. There is article in todays WSJ in the bank of the B section that talks about pricing pressures - cost inflation is showing up but producers are having a difficult time passing it on to end-user, that leads to compressed profit margins, lower profits translate into muted gains and/or price deflation in the equity markets. Not saying that is happening now, but that one should not discount that we could be in for choppy seas down the road.
I think it is better to say experts are saying X% real and go from there rather than saying experts are saying Y% nominal and going from there as I think that is generally how they work. But no matter, I agree with your sense of what many are saying. Not sure they if they are overly concerned or not, but if history in the US says a 60/40 portfolio returned about 4% real, maybe a shade more (and globally it was lower) and if we indeed get into a prolonged lower growth era, then 2% might not be optimistic, but not horribly pessimistic.

I note that the "4% rule" barely holds or even fails slightly in some historical periods and that implies a real return of about 1.3% in the sense that TIPS returning 1.3% also supports a 4% withdrawal for 30 years.

I sure hope we do better. But one ought to at least carefully consider what happens if we don't.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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willthrill81
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Re: Rate to project out savings

Post by willthrill81 » Tue Jan 31, 2017 11:49 am

Grt2bOutdoors wrote:Well, expectations are that long term returns will be below par going forward due to high price to earnings, higher price to book, slowing economic growth globally, potentially higher inflation - all the names we respect and follow are saying it - expect lower returns going forward. If you believe inflation is 2% in the long-run and experts (the ones we follow, not the shills on CNBC) are saying 5% for equities, you have 3% real. If you believe 3% inflation, and experts are saying 5% returns, you now have 2% real - and that is being optimistic. There is article in todays WSJ in the bank of the B section that talks about pricing pressures - cost inflation is showing up but producers are having a difficult time passing it on to end-user, that leads to compressed profit margins, lower profits translate into muted gains and/or price deflation in the equity markets. Not saying that is happening now, but that one should not discount that we could be in for choppy seas down the road.
Most of the projections, which are really nothing but informed guesses, are only based on the next ten years or so. For a 35 year accumulation period, all of that is pretty much moot.

If you assume a 2% real rate of return, the OP would have to save $3,350 a month for 35 years to end with $2M in today's dollars, which would roughly provide $80,000 income assuming a 4% WR but only $60,000 with a 3% WR, which would probably be what you would use in this pessimistic scenario. That's saving roughly 75% of the median household income, a LOT of money to save for a very long time.

I am more optimistic about markets, but I'm certainly not betting on my 100% equity portfolio with a small cap and value tilt even achieving a 7% real rate of return (approximate historic real return of U.S. equities), despite that it's historically achieved close to 9%.
“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

Grt2bOutdoors
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Re: Rate to project out savings

Post by Grt2bOutdoors » Tue Jan 31, 2017 12:26 pm

willthrill81 wrote:
Grt2bOutdoors wrote:Well, expectations are that long term returns will be below par going forward due to high price to earnings, higher price to book, slowing economic growth globally, potentially higher inflation - all the names we respect and follow are saying it - expect lower returns going forward. If you believe inflation is 2% in the long-run and experts (the ones we follow, not the shills on CNBC) are saying 5% for equities, you have 3% real. If you believe 3% inflation, and experts are saying 5% returns, you now have 2% real - and that is being optimistic. There is article in todays WSJ in the bank of the B section that talks about pricing pressures - cost inflation is showing up but producers are having a difficult time passing it on to end-user, that leads to compressed profit margins, lower profits translate into muted gains and/or price deflation in the equity markets. Not saying that is happening now, but that one should not discount that we could be in for choppy seas down the road.
Most of the projections, which are really nothing but informed guesses, are only based on the next ten years or so. For a 35 year accumulation period, all of that is pretty much moot.

If you assume a 2% real rate of return, the OP would have to save $3,350 a month for 35 years to end with $2M in today's dollars, which would roughly provide $80,000 income assuming a 4% WR but only $60,000 with a 3% WR, which would probably be what you would use in this pessimistic scenario. That's saving roughly 75% of the median household income, a LOT of money to save for a very long time.

I am more optimistic about markets, but I'm certainly not betting on my 100% equity portfolio with a small cap and value tilt even achieving a 7% real rate of return (approximate historic real return of U.S. equities), despite that it's historically achieved close to 9%.
However, those who don't have 35 years of accumulation would be wise to use a rate that is in proximity with the time frame from accumulation to mid retirement as by that time most folks have dialed down the equity risk and the with that comes the reduction in portfolio returns, it's more of a "keep what you have strategy" lest you wind up eating Alpo under a highway overpass.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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