@cm the 4% rule worked usually.
I use 4% real because otherwise how could the 4% rule have a chance? Must actually be higher to survive the ups and downs and withdrawals still go up with inflation.
I don’t see why people don’t anticipate an 8% rate of return.
I don’t see why people don’t anticipate an 8% rate of return. The s+p has a 10% rate of return over a 50 year period. If you are mostly in stocks, I don’t see why you wouldn’t anticipate similar returns in the future. I am relatively new investor (10-15 years). I think that for the past 5-10 years, everybody has been saying to expect lower then expected returns, but in actuality, they have been higher or on average. It seems fine to project with a 3-5% return, but if you project lower and budget accordingly, there is a downside to ending up with too much in assets when you die. It means you were cutting spending when you did not need to, and a large inheritance is not always a good thing for kids. The biggest risk to future returns seems to be incompetence in our government with our out of control debt/deficits.
There was a recent thread over on the bogleheads forum about what real rates people use for their planning that got me thinking about whether my assumption for my planning is reasonable. What real rate do you use (or would you suggest) with the following assumptions: an 80/20 or 75/25 portfolio and investing for 25-30 years (i.e. for someone now in their early 30s).
I was surprised to see that most folks over on the other thread were saying they would use a 1% to 2.5% real rate, with a few outliers saying they use 3% to 4.5% (and maybe one person saying they’d use 5%+). There were lots of cautions to not use anything too optimistic, which seems to them to be anything more than 1.5% or 2.0%.
Does that seem right to you? What do you use? If a real rate of 2.0% to 2.5% or so really is realistic, it seems pretty challenging for most people (including a lot of medium- and high-income earners) to comfortably get to a point where they can retire with $100k or $120k per year coming from their investments (using a 4% or 3% rule for the required size of a portfolio at retirement), particularly if they want to do it before age 60 or so.
Thoughts?
For US stocks: The dividend yield plus the LT real growth rate of earnings (1.25% according to Siegel, and about 1.5% according to Arnott, and about 1.55% from Shiller’s spreadsheet IIRC) minus a haircut for a fall in valuation. That is, I apply a PE10 of 15 to 20 at my horizon of interest. That change (i.e., decline) in valuation is very important over short horizons, but less so over long horizons.
For bonds: The real yield on TIPS.
Sounds like you are an acolyte of William Bernstein’s work. My assumptions are basically the same.
I use 4% real because otherwise how could the 4% rule have a chance? Must actually be higher to survive the ups and downs and withdrawals still go up with inflation.
There was a recent thread over on the bogleheads forum about what real rates people use for their planning that got me thinking about whether my assumption for my planning is reasonable. What real rate do you use (or would you suggest) with the following assumptions: an 80/20 or 75/25 portfolio and investing for 25-30 years (i.e. for someone now in their early 30s).
I was surprised to see that most folks over on the other thread were saying they would use a 1% to 2.5% real rate, with a few outliers saying they use 3% to 4.5% (and maybe one person saying they’d use 5%+). There were lots of cautions to not use anything too optimistic, which seems to them to be anything more than 1.5% or 2.0%.
Does that seem right to you? What do you use? If a real rate of 2.0% to 2.5% or so really is realistic, it seems pretty challenging for most people (including a lot of medium- and high-income earners) to comfortably get to a point where they can retire with $100k or $120k per year coming from their investments (using a 4% or 3% rule for the required size of a portfolio at retirement), particularly if they want to do it before age 60 or so.
Thoughts?
For US stocks: The dividend yield plus the LT real growth rate of earnings (1.25% according to Siegel, and about 1.5% according to Arnott, and about 1.55% from Shiller’s spreadsheet IIRC) minus a haircut for a fall in valuation. That is, I apply a PE10 of 15 to 20 at my horizon of interest. That change (i.e., decline) in valuation is very important over short horizons, but less so over long horizons.
For bonds: The real yield on TIPS.
Leave a comment: