What rate of return are you using for retirement projections?

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ronhh
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What rate of return are you using for retirement projections?

Post by ronhh » Sat Jul 07, 2018 9:05 am

I'm 56 years old, and have been planning diligently for an anticipated retirement at age 60. I use a 30-year retirement duration for my planning purposes (60 to 90 years of age). My question: what rate of return do some of you use when you're looking at how long your nest egg will last? I struggle a little with this (aside from the uncertainties of taxes, inflation, etc.). Just curious, from a simplistic perspective, what rate you're using? I tend to be a little conservative, and so typically use 3.50% to 4.50% as my base case. Thanks! Love this forum.
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ronhh
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Re: What rate of return are you using for retirement projections?

Post by ronhh » Sat Jul 07, 2018 9:12 am

And I should mention, from a portfolio allocation standpoint, I plan to be about 40% Vanguard Stock Index Fund(s); 40% Vanguard Bond Index Fund(s); and 20% cash and near cash (money market/CD's)
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Re: What rate of return are you using for retirement projections?

Post by averagedude » Sat Jul 07, 2018 9:19 am

The projections i am using are somewhat conservative:
Stocks. 3.5% real return
Bonds. 0.5% real return
Cash. 0.0% real return

With your portfolio using these numbers will give you a 1.6% real return.

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Re: What rate of return are you using for retirement projections?

Post by msk » Sat Jul 07, 2018 9:29 am

What matters is the REAL rate of return. It's lousy with bonds and better with stocks. Normally negative with cash. Your AA matters. Market behavior matters. I suggest you use
https://www.portfoliovisualizer.com/mon ... simulation
to gauge the probability distribution of likely outcomes. Personally I plan on the 50 percentile in the Monte Carlo simulations (5% p.a. real terms on a 100% stocks portfolio) but keep in mind the low and high probabilities (25 and 75 percentiles). If you want to be terrified, you can plan your life on the 10 percentile. Or you can also contemplate World War III. IMHO no need to be overly pessimistic. As long as you NEVER withdraw in excess of 5% of your portfolio in any future year, your portfolio ought to retain its real value forever and your annual withdrawals ought to grow, on average, in line with inflation, forever. It is very important that once retired you remain flexible vis a vis withdrawals. Just super silly to purchase a new car following a year with a market crash just because some projection says 4% initial WR with annual inflation will keep you financially sound for 30 years. That's OK for pre-retirement planning, but dumb to practise post retirement.

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Re: What rate of return are you using for retirement projections?

Post by jebmke » Sat Jul 07, 2018 9:35 am

averagedude wrote:
Sat Jul 07, 2018 9:19 am
The projections i am using are somewhat conservative:
Stocks. 3.5% real return
Bonds. 0.5% real return
Cash. 0.0% real return

With your portfolio using these numbers will give you a 1.6% real return.
I haven't really done projections in a while but this is pretty close for me if I did one today. I round the bonds to zero real because it makes the estimate of my future RMD easy for tax analysis.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: What rate of return are you using for retirement projections?

Post by Atomic » Sat Jul 07, 2018 9:39 am

I use 5 percent real. 15 to 20 years out with 90,10 asset allocation.

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Re: What rate of return are you using for retirement projections?

Post by TomatoTomahto » Sat Jul 07, 2018 9:39 am

averagedude wrote:
Sat Jul 07, 2018 9:19 am
The projections i am using are somewhat conservative:
Stocks. 3.5% real return
Bonds. 0.5% real return
Cash. 0.0% real return

With your portfolio using these numbers will give you a 1.6% real return.
I think those are optimistic. I hope you're right. I personally expect:

Stocks: 2% real return
Bonds: 0% real return
Cash: -2.5 % real return

If it's better than this, wheeeee! If it's worse, I'm okay. If it's profoundly worse, well, I won't be the only one in trouble.

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Re: What rate of return are you using for retirement projections?

Post by am » Sat Jul 07, 2018 9:44 am

Can someone post what returns are needed to support 4% and 5% + inflation adjustment yearly withdrawals? Thanks

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Re: What rate of return are you using for retirement projections?

Post by delamer » Sat Jul 07, 2018 11:43 am

am wrote:
Sat Jul 07, 2018 9:44 am
Can someone post what returns are needed to support 4% and 5% + inflation adjustment yearly withdrawals? Thanks

What do you mean by support?

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Re: What rate of return are you using for retirement projections?

Post by am » Sat Jul 07, 2018 11:45 am

delamer wrote:
Sat Jul 07, 2018 11:43 am
am wrote:
Sat Jul 07, 2018 9:44 am
Can someone post what returns are needed to support 4% and 5% + inflation adjustment yearly withdrawals? Thanks

What do you mean by support?
So you don’t run out of money after 30 yrs. what kind of nominal and real return do you need?

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Re: What rate of return are you using for retirement projections?

Post by siamond » Sat Jul 07, 2018 11:48 am

am wrote:
Sat Jul 07, 2018 9:44 am
Can someone post what returns are needed to support 4% and 5% + inflation adjustment yearly withdrawals? Thanks
Unfortunately, this is more complicated. Returns (as captured by the CAGR metric) are independent from sequence of returns issues. Safe Withdrawal Rates are highly dependent on sequence of returns (a crisis early in retirement can be quite damageable), so the same CAGR for two historical periods could end up with very distinct SWRs.

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Re: What rate of return are you using for retirement projections?

Post by jjface » Sat Jul 07, 2018 11:49 am

I think one should use a range as well as using tools like firecalc and i-orp.

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Re: What rate of return are you using for retirement projections?

Post by LadyGeek » Sat Jul 07, 2018 11:52 am

This thread is now in the Personal Finance (Not Investing) forum (retirement planning).
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Re: What rate of return are you using for retirement projections?

Post by gilgamesh » Sat Jul 07, 2018 11:56 am

5% during accumulation phase. 3% real.

Absolutely doesn’t matter, as if I fall short I work more and if I underestimated I retire early.

In retirement, I rely on US treasury returns. I dare not assume anything else, when my working equity is zero and my life depends on not just return but sequence of return.

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Re: What rate of return are you using for retirement projections?

Post by tibbitts » Sat Jul 07, 2018 12:19 pm

ronhh wrote:
Sat Jul 07, 2018 9:12 am
And I should mention, from a portfolio allocation standpoint, I plan to be about 40% Vanguard Stock Index Fund(s); 40% Vanguard Bond Index Fund(s); and 20% cash and near cash (money market/CD's)
Wow you're very y optimistic at 3.5 - 4.5% with that allocation. I'm assuming you mean nominal.

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Re: What rate of return are you using for retirement projections?

Post by KlangFool » Sat Jul 07, 2018 12:25 pm

OP,

Do you need to know the rate of return? Depending on your portfolio size as a multiple of your annual expense, it may not matter. Without social security, my portfolio will be 25 times my annual expense. With social security, my portfolio will be 50 times my annual expense. With a portfolio at 50 times or more annual expense, the rate of return does not come into play at all.

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Re: What rate of return are you using for retirement projections?

Post by Rick Ferri » Sat Jul 07, 2018 12:29 pm

Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: What rate of return are you using for retirement projections?

Post by aristotelian » Sat Jul 07, 2018 1:05 pm

I don't really project returns. I know the 4% rules works for all historical scenarios so I figure 3.5% will be failsafe. I don't need more specific projections than that.

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Re: What rate of return are you using for retirement projections?

Post by 2015 » Sat Jul 07, 2018 1:20 pm

None. No interest. Assuming significantly below average returns using Fidelity's retirement planner more for entertainment than anything else. LMP insulates me from having to care.

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Re: What rate of return are you using for retirement projections?

Post by mickeyd » Sat Jul 07, 2018 1:34 pm

I do not make/rely on projections any more. I am satisfied to receive what the entire market is sequenced to give me.

My plan is working...
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Re: What rate of return are you using for retirement projections?

Post by unclescrooge » Sat Jul 07, 2018 2:57 pm

averagedude wrote:
Sat Jul 07, 2018 9:19 am
The projections i am using are somewhat conservative:
Stocks. 3.5% real return
Bonds. 0.5% real return
Cash. 0.0% real return

With your portfolio using these numbers will give you a 1.6% real return.
Similar.
+4%
0%
-0.5%

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Re: What rate of return are you using for retirement projections?

Post by 1210sda » Sat Jul 07, 2018 3:09 pm

Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
Just making sure.....global equities includes U.S., right?
1210

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Re: What rate of return are you using for retirement projections?

Post by corn18 » Sat Jul 07, 2018 4:03 pm

0% real across the portfolio. I’m in the accumulation phase but 3 years from potential retirement. Not sure what I assume in retirement as I use firecalc, iORP, flexible retirement planner and a spreadsheet to look at scenarios and probabilities. I assume they all assume something for my 60/40 planned AA. My own spreadsheet still assumes 0% real in retirement.

I do find it exciting when it’s more than that. Yeah me!

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Re: What rate of return are you using for retirement projections?

Post by Rick Ferri » Sat Jul 07, 2018 4:28 pm

1210sda wrote:
Sat Jul 07, 2018 3:09 pm
Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
Just making sure.....global equities includes U.S., right?
1210
Yes. I intend to update my detailed 30-year forecast this December. Until then, I’m being general and saying global equity, which includes approximately 50% US.

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Re: What rate of return are you using for retirement projections?

Post by One Ping » Sun Jul 08, 2018 12:05 am

Rick Ferri wrote:
Sat Jul 07, 2018 4:28 pm
I intend to update my detailed 30-year forecast this December. Until then, I’m being general and saying global equity, which includes approximately 50% US.

Rick Ferri
Rick, where will your updated forecast appear?
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Re: What rate of return are you using for retirement projections?

Post by Bacchus01 » Sun Jul 08, 2018 7:36 am

Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
This

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.

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Re: What rate of return are you using for retirement projections?

Post by jebmke » Sun Jul 08, 2018 7:43 am

Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am
Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
This

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
The current yields on TIPS are 5-year - .5%-ish and 7-year .7%-ish so the 2% real yield implied by these estimates are inconsistent with what yields on current instruments are predicting.

My average duration is under 5 years so I simplify things by averaging down to zero real return on the bond portion which simplifies my prediction of RMD for tax planning. I could use a positive real return but it would be so low it wouldn't affect any life decisions and adds an extra step in my tax calculations so I don't bother.

I don't project equity returns because it has no bearing on decision making (for me).
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: What rate of return are you using for retirement projections?

Post by TheTimeLord » Sun Jul 08, 2018 7:45 am

I don't use a single number. My estimated income spreadsheet calculates 3%, 3.3%, 3.5% and 4% real. I also concentrate on ages 90, 93 and 96. But my go to is 3.3% until age 93. Right now all return rates and for all ages are definitely green but if say 3% until 96 was yellow or red I would just use human capital in the form of OMY to address the shortfall thus increasing my savings and reducing the projected length of my retirement.
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Re: What rate of return are you using for retirement projections?

Post by Bacchus01 » Sun Jul 08, 2018 8:07 am

jebmke wrote:
Sun Jul 08, 2018 7:43 am
Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am
Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
This

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
The current yields on TIPS are 5-year - .5%-ish and 7-year .7%-ish so the 2% real yield implied by these estimates are inconsistent with what yields on current instruments are predicting.

My average duration is under 5 years so I simplify things by averaging down to zero real return on the bond portion which simplifies my prediction of RMD for tax planning. I could use a positive real return but it would be so low it wouldn't affect any life decisions and adds an extra step in my tax calculations so I don't bother.

I don't project equity returns because it has no bearing on decision making (for me).
But the question was retirement, not 7 years. I'm 45. So I'm projecting to retirement (20 years) and then beyond (35 years) so 55 years total. A 7-year doesn't really tell me much in that scenario.

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Re: What rate of return are you using for retirement projections?

Post by jebmke » Sun Jul 08, 2018 8:12 am

The longest Tip now trading (Feb 2048) is at .8% yield (real). Hard to see a path to 2% real on bonds. Maybe we will get there; we have been there before but nothing in the current term structure points you there.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: What rate of return are you using for retirement projections?

Post by TheTimeLord » Sun Jul 08, 2018 8:16 am

Bacchus01 wrote:
Sun Jul 08, 2018 8:07 am
jebmke wrote:
Sun Jul 08, 2018 7:43 am
Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am
Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
This

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
The current yields on TIPS are 5-year - .5%-ish and 7-year .7%-ish so the 2% real yield implied by these estimates are inconsistent with what yields on current instruments are predicting.

My average duration is under 5 years so I simplify things by averaging down to zero real return on the bond portion which simplifies my prediction of RMD for tax planning. I could use a positive real return but it would be so low it wouldn't affect any life decisions and adds an extra step in my tax calculations so I don't bother.

I don't project equity returns because it has no bearing on decision making (for me).
But the question was retirement, not 7 years. I'm 45. So I'm projecting to retirement (20 years) and then beyond (35 years) so 55 years total. A 7-year doesn't really tell me much in that scenario.
Personally, If I was 20 years from retirement I would choose my AA and glide path, put my head down and contribute what I could to my portfolio checking the value periodically. Then in about 15 years I would look up and see where I was before I would start worrying about projecting returns.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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Re: What rate of return are you using for retirement projections?

Post by Bacchus01 » Sun Jul 08, 2018 8:18 am

TheTimeLord wrote:
Sun Jul 08, 2018 8:16 am
Bacchus01 wrote:
Sun Jul 08, 2018 8:07 am
jebmke wrote:
Sun Jul 08, 2018 7:43 am
Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am
Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
This

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
The current yields on TIPS are 5-year - .5%-ish and 7-year .7%-ish so the 2% real yield implied by these estimates are inconsistent with what yields on current instruments are predicting.

My average duration is under 5 years so I simplify things by averaging down to zero real return on the bond portion which simplifies my prediction of RMD for tax planning. I could use a positive real return but it would be so low it wouldn't affect any life decisions and adds an extra step in my tax calculations so I don't bother.

I don't project equity returns because it has no bearing on decision making (for me).
But the question was retirement, not 7 years. I'm 45. So I'm projecting to retirement (20 years) and then beyond (35 years) so 55 years total. A 7-year doesn't really tell me much in that scenario.
Personally, If I was 20 years from retirement I would choose my AA and glide path, put my head down and contribute what I could to my portfolio checking the value periodically. Then in about 15 years I would look up and see where I was before I would start worrying about projecting returns.
Not if you are trying to retire early.

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Re: What rate of return are you using for retirement projections?

Post by Blueskies123 » Sun Jul 08, 2018 8:18 am

I am hoping for 4% but planning on 3%. If I see my return is more in the 4% range for several years I will up my spending either in travel or home improvement. My portfolio is 50/50 but as I get hit my late 60's and 70's I will take my RMD's mostly out of bonds and allow my portfolio to edge closer to 60/40.

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Re: What rate of return are you using for retirement projections?

Post by The Wizard » Sun Jul 08, 2018 8:23 am

mickeyd wrote:
Sat Jul 07, 2018 1:34 pm
I do not make/rely on projections any more. I am satisfied to receive what the entire market is sequenced to give me.

My plan is working...
Same here, basically; I use zero growth in my projections.
I maintain a spreadsheet which projects my monthly/annual retirement income.
I started this a year or two before I retired in 2013.
So if I have $1M in tax-deferred and I withdraw $50,000 over the year, then I have $950,000 at start of following year.

But...I update my sheet each January with current numbers such as updated SS and variable annuity payouts and updated portfolio balances. I hold around 60% stocks in my portfolio, so I expect it to grow over time, but one year to the next, you never know...
Last edited by The Wizard on Sun Jul 08, 2018 8:31 am, edited 1 time in total.
Attempted new signature...

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Re: What rate of return are you using for retirement projections?

Post by The Wizard » Sun Jul 08, 2018 8:29 am

TheTimeLord wrote:
Sun Jul 08, 2018 8:16 am

Personally, If I was 20 years from retirement I would choose my AA and glide path, put my head down and contribute what I could to my portfolio checking the value periodically. Then in about 15 years I would look up and see where I was before I would start worrying about projecting returns.
Correct, this is what I did.
You need to have some idea of your accumulation goal based on your personal situation.
But savings rate is what matters for accumulators until they get close to end-game...
Attempted new signature...

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Re: What rate of return are you using for retirement projections?

Post by TheTimeLord » Sun Jul 08, 2018 8:31 am

Bacchus01 wrote:
Sun Jul 08, 2018 8:18 am
TheTimeLord wrote:
Sun Jul 08, 2018 8:16 am
Bacchus01 wrote:
Sun Jul 08, 2018 8:07 am
jebmke wrote:
Sun Jul 08, 2018 7:43 am
Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am


This

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
The current yields on TIPS are 5-year - .5%-ish and 7-year .7%-ish so the 2% real yield implied by these estimates are inconsistent with what yields on current instruments are predicting.

My average duration is under 5 years so I simplify things by averaging down to zero real return on the bond portion which simplifies my prediction of RMD for tax planning. I could use a positive real return but it would be so low it wouldn't affect any life decisions and adds an extra step in my tax calculations so I don't bother.

I don't project equity returns because it has no bearing on decision making (for me).
But the question was retirement, not 7 years. I'm 45. So I'm projecting to retirement (20 years) and then beyond (35 years) so 55 years total. A 7-year doesn't really tell me much in that scenario.
Personally, If I was 20 years from retirement I would choose my AA and glide path, put my head down and contribute what I could to my portfolio checking the value periodically. Then in about 15 years I would look up and see where I was before I would start worrying about projecting returns.
Not if you are trying to retire early.
Yes, I definitely would because from my point of view there are 2 critical things to be remembered. First, plans should be adjustable if circumstances significantly change. So if you check the value of your portfolio and you have enough to retire early then retire if you want. Second, projections are irrelevant from my point of view when you are working and contributing because the market is going to do what it is going to do regardless or anyone's projection. So what real difference does a projection make? Control what you can spending, contributions and asset allocation then accept what the market returns.

Personally, I spent way too much time in my life making plans for retiring early when it was a couple decades out. Making decisions that had little or no real effect but allowed me to have an illusion of control. Even today, I would say 90+% of my financial planning is either wasted time, entertainment or behavior management rather than something that will produce an actual difference in the value of my portfolio 10 years from today. After all it isn't like I know what the best move for the next 10 years is, and if I did then it would only take what 30 minutes to an hour to execute. Control your spending within reason, contribute what you can but not to the point of misery and live life along the way (yes, life begins before retirement) then hope things work out when it is time to retire.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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Re: What rate of return are you using for retirement projections?

Post by Murgatroyd » Sun Jul 08, 2018 8:41 am

Historically I have used 2%. Until I recently realized dividends and interest alone accounted for 2.4%. So I got aggressive and changed the formula to 3%.

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Re: What rate of return are you using for retirement projections?

Post by dwickenh » Sun Jul 08, 2018 8:48 am

Murgatroyd wrote:
Sun Jul 08, 2018 8:41 am
Historically I have used 2%. Until I recently realized dividends and interest alone accounted for 2.4%. So I got aggressive and changed the formula to 3%.
OMG you are aggressive...... :sharebeer

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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Rick Ferri
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Re: What rate of return are you using for retirement projections?

Post by Rick Ferri » Sun Jul 08, 2018 8:50 am

Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
To clarify, intermediate-term bonds includes corporate, mortgages and government.

The numbers provided are all nominal. Converting to real returns would be:

0.5% cash and cash-like
2.0% intermediate-term bonds
5.0% global equities
3.5% balanced 60/40 with some cash
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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TomatoTomahto
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Re: What rate of return are you using for retirement projections?

Post by TomatoTomahto » Sun Jul 08, 2018 8:50 am

Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
I admit that I'm probably pessimistic. In fact, I hope that I am. The asymmetric situation is that, if I'm overly pessimistic, my heirs/charity get more than I was anticipating; if I figure on getting great returns, I might be sadly disappointed, and my heirs would have to support me.

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Re: What rate of return are you using for retirement projections?

Post by jebmke » Sun Jul 08, 2018 8:53 am

TheTimeLord wrote:
Sun Jul 08, 2018 8:16 am
Personally, If I was 20 years from retirement I would choose my AA and glide path, put my head down and contribute what I could to my portfolio checking the value periodically.
This is essentially what we did. We established a saving and investment plan early and didn't deviate from that. I didn't even pay much attention to things until 2004; I ended up retiring in 2007 but the decision was not a financial one. The financial aspects were merely enabling. For many years we had such low visibility on the entire portfolio that it was meaningless to try to make projections.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Bacchus01
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Re: What rate of return are you using for retirement projections?

Post by Bacchus01 » Sun Jul 08, 2018 9:15 am

TheTimeLord wrote:
Sun Jul 08, 2018 8:31 am
Bacchus01 wrote:
Sun Jul 08, 2018 8:18 am
TheTimeLord wrote:
Sun Jul 08, 2018 8:16 am
Bacchus01 wrote:
Sun Jul 08, 2018 8:07 am
jebmke wrote:
Sun Jul 08, 2018 7:43 am

The current yields on TIPS are 5-year - .5%-ish and 7-year .7%-ish so the 2% real yield implied by these estimates are inconsistent with what yields on current instruments are predicting.

My average duration is under 5 years so I simplify things by averaging down to zero real return on the bond portion which simplifies my prediction of RMD for tax planning. I could use a positive real return but it would be so low it wouldn't affect any life decisions and adds an extra step in my tax calculations so I don't bother.

I don't project equity returns because it has no bearing on decision making (for me).
But the question was retirement, not 7 years. I'm 45. So I'm projecting to retirement (20 years) and then beyond (35 years) so 55 years total. A 7-year doesn't really tell me much in that scenario.
Personally, If I was 20 years from retirement I would choose my AA and glide path, put my head down and contribute what I could to my portfolio checking the value periodically. Then in about 15 years I would look up and see where I was before I would start worrying about projecting returns.
Not if you are trying to retire early.
Yes, I definitely would because from my point of view there are 2 critical things to be remembered. First, plans should be adjustable if circumstances significantly change. So if you check the value of your portfolio and you have enough to retire early then retire if you want. Second, projections are irrelevant from my point of view when you are working and contributing because the market is going to do what it is going to do regardless or anyone's projection. So what real difference does a projection make? Control what you can spending, contributions and asset allocation then accept what the market returns.

Personally, I spent way too much time in my life making plans for retiring early when it was a couple decades out. Making decisions that had little or no real effect but allowed me to have an illusion of control. Even today, I would say 90+% of my financial planning is either wasted time, entertainment or behavior management rather than something that will produce an actual difference in the value of my portfolio 10 years from today. After all it isn't like I know what the best move for the next 10 years is, and if I did then it would only take what 30 minutes to an hour to execute. Control your spending within reason, contribute what you can but not to the point of misery and live life along the way (yes, life begins before retirement) then hope things work out when it is time to retire.
I’m glad that worked out well for you. I can’t agree with much of what you said other than invest, save and manage expenses, but I’m glad it has worked out for you.

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TheTimeLord
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Re: What rate of return are you using for retirement projections?

Post by TheTimeLord » Sun Jul 08, 2018 9:37 am

Bacchus01 wrote:
Sun Jul 08, 2018 9:15 am
TheTimeLord wrote:
Sun Jul 08, 2018 8:31 am
Bacchus01 wrote:
Sun Jul 08, 2018 8:18 am
TheTimeLord wrote:
Sun Jul 08, 2018 8:16 am
Bacchus01 wrote:
Sun Jul 08, 2018 8:07 am


But the question was retirement, not 7 years. I'm 45. So I'm projecting to retirement (20 years) and then beyond (35 years) so 55 years total. A 7-year doesn't really tell me much in that scenario.
Personally, If I was 20 years from retirement I would choose my AA and glide path, put my head down and contribute what I could to my portfolio checking the value periodically. Then in about 15 years I would look up and see where I was before I would start worrying about projecting returns.
Not if you are trying to retire early.
Yes, I definitely would because from my point of view there are 2 critical things to be remembered. First, plans should be adjustable if circumstances significantly change. So if you check the value of your portfolio and you have enough to retire early then retire if you want. Second, projections are irrelevant from my point of view when you are working and contributing because the market is going to do what it is going to do regardless or anyone's projection. So what real difference does a projection make? Control what you can spending, contributions and asset allocation then accept what the market returns.

Personally, I spent way too much time in my life making plans for retiring early when it was a couple decades out. Making decisions that had little or no real effect but allowed me to have an illusion of control. Even today, I would say 90+% of my financial planning is either wasted time, entertainment or behavior management rather than something that will produce an actual difference in the value of my portfolio 10 years from today. After all it isn't like I know what the best move for the next 10 years is, and if I did then it would only take what 30 minutes to an hour to execute. Control your spending within reason, contribute what you can but not to the point of misery and live life along the way (yes, life begins before retirement) then hope things work out when it is time to retire.
I’m glad that worked out well for you. I can’t agree with much of what you said other than invest, save and manage expenses, but I’m glad it has worked out for you.
Not a problem, your life, your choices.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

AlohaJoe
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Re: What rate of return are you using for retirement projections?

Post by AlohaJoe » Sun Jul 08, 2018 9:39 am

am wrote:
Sat Jul 07, 2018 9:44 am
Can someone post what returns are needed to support 4% and 5% + inflation adjustment yearly withdrawals? Thanks
Here's the math

Code: Select all

power(1 + X, 30) * (1 / Y) = 30
where Y is the % you want to withdraw. So for 5% it would be:

Code: Select all

power(1 + X, 30) * (1 / 5%) = 30
X is the inflation-adjusted return required for 5% to last 30 years. That's the number you're asking about.

Then rewrite the equation

Code: Select all

power(1 + X, 30) * 20 = 30
power(1 + X, 30) = 30/20
1 + X = power(30/20, 1/30)
X = power(30/20, 1/30) - 1
That's the answer for 5%. Now we can do the same thing for 4%.

Code: Select all

power(1 + X, 30) * (1 / 4%) = 30
power(1 + X, 30) * 25 = 30
power(1 + X, 30) = 30/25
1 + X = power(30/25, 1/30)
X = power(30/25, 1/30) - 1
Of course, this is assuming constant growth every year, which isn't what happens in the real world. But that's the answer to your question.

delamer
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Re: What rate of return are you using for retirement projections?

Post by delamer » Sun Jul 08, 2018 11:09 am

TomatoTomahto wrote:
Sun Jul 08, 2018 8:50 am
Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
I admit that I'm probably pessimistic. In fact, I hope that I am. The asymmetric situation is that, if I'm overly pessimistic, my heirs/charity get more than I was anticipating; if I figure on getting great returns, I might be sadly disappointed, and my heirs would have to support me.
While I am not quite as pessimistic, I agree with your approach.

I want my financial surprises to be pleasant on the upside, not unpleasant on the downside.

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BolderBoy
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Re: What rate of return are you using for retirement projections?

Post by BolderBoy » Sun Jul 08, 2018 12:18 pm

ronhh wrote:
Sat Jul 07, 2018 9:05 am
I'm 56 years old, and have been planning diligently for an anticipated retirement at age 60. I use a 30-year retirement duration for my planning purposes (60 to 90 years of age). My question: what rate of return do some of you use when you're looking at how long your nest egg will last?
FIREcalc.com and cFIREsim.com are two websites offering similar calculators that can probably offer you good estimations of what you are really seeking: "Will my money last long enough?"
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Bacchus01
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Re: What rate of return are you using for retirement projections?

Post by Bacchus01 » Wed Jul 11, 2018 2:20 pm

Bacchus01 wrote:
Sun Jul 08, 2018 7:36 am
Rick Ferri wrote:
Sat Jul 07, 2018 12:29 pm
Using broad market ultra-low cost index funds, I would use the following nominal expected 30 year returns for planning:

2.0% inflation
2.5% cash and cash-like
4.0% intermediate-term bonds
7.0% global equities
5.5% balanced 60/40 with some cash

Rick Ferri
This

Some of you are real pessimists! Wow.

I use 5% real for equities, but I use 8% nominal and 3% inflation. I am 95% equities and will probably stay there for a very long time. I’m more worried about my expenses escalating than my investments returning.
I was wrong. Checked my notes again. I actually use 7% and 2% (so 5% real on equities) in my model. I'm glad to see it matches Rick's!

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Phineas J. Whoopee
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Re: What rate of return are you using for retirement projections?

Post by Phineas J. Whoopee » Wed Jul 11, 2018 4:36 pm

Zero percent real.

Most likely it will wind up having been higher than that.

PJW

CantPassAgain
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Re: What rate of return are you using for retirement projections?

Post by CantPassAgain » Wed Jul 11, 2018 4:45 pm

Whichever one gets me to a million dollars at age 55.

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Rick Ferri
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Re: What rate of return are you using for retirement projections?

Post by Rick Ferri » Wed Jul 11, 2018 10:03 pm

With the exception of a US zero-coupon Treasury return, which we know, every forecast has a probably distribution around the expected return, and some distributions are wider than others.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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