What is a reasonable real rate of return?

[afan]

nephron wrote:

I 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.

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It is not possible to have too much when you die.

I feel no need to spend as much as I can. I do not have dying broke as a goal. I spend what I need to live a comfortable life and save the rest.

I hope and plan for my networth to increase during retirement.  I should die with more money than when I retire. If my real return is more than 1% then all the better.

It will not be "too much."

[Lordosis]

I see what you are saying. You can always give it away to charity or heirs. However consider that you might have retired or gone part time several years earlier if you took a more optimistic view. I don't have a burning desire to clock out before age 50 but I would hate to work until 70 if I could have retired very comfortably at 60.

[Panscan]

afan wrote:

nephron wrote:

I 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.

Click to expand…

It is not possible to have too much when you die.

I feel no need to spend as much as I can. I do not have dying broke as a goal. I spend what I need to live a comfortable life and save the rest.

I hope and plan for my networth to increase during retirement.  I should die with more money than when I retire. If my real return is more than 1% then all the better.

It will not be “too much.”

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why? I'd rather donate it to causes I care about than leave it to heirs to do whatever with (and probably make them worse off for it)

 

I think it is absolutely is possible to have too much when you die. there are tons of worthy causes worth donating to. way more than any of us will have money to address

[Anne]

Panscan, you can have your will set up to donate to charities when you die.

[racelari]

btw guys back to Wade Pfau, he recommends sort of U shaped stock allocation when approaching and going through retirement.  He recommends when young doing something like 80/20, and then right before or at retirement 50/50, which makes a lot of sense for me.  But then as you are about to hit your last years of life when you've almost drained your entire nest egg he suggests going back to 80/20- crazy!!!  Can anybody explain why?  Not sure if his line of reasoning is that when you are about to reach the end of retirement, ************************, you have a high chance of dying at anytime so just let your risk tolerant ride???

actually as I'm writing this doesn't sound too crazy, but I doubt this "your about to die" thing is the reason . . .

So you take Wade's dynamic change in stock allocation along with modifying withdrawal rate depending on how the market is doing, we should not have to be too pessimistic and assume a crappy rate of return.  If we happen to get less than 5% real, well ************************, we can just roll with the punches and modify these two factors.

So I'm sticking to 5% real in my future value calculations.

Actually the real reason is b/c Jim Dahle does it!

[bean1970]

i use 4%, but honestly i have only thought about this since number recently when i became engulfed with forums and finance peeps. I really never thought about anything (allocation %s, rate of return, withdrawal rates, etc) except socking money away month after month after month...and then one day you wake up and you have a very large pot and it really doesn't matter anymore.....true story.

[Zaphod]

racelari wrote:

btw guys back to Wade Pfau, he recommends sort of U shaped stock allocation when approaching and going through retirement.  He recommends when young doing something like 80/20, and then right before or at retirement 50/50, which makes a lot of sense for me.  But then as you are about to hit your last years of life when you’ve almost drained your entire nest egg he suggests going back to 80/20- crazy!!!  Can anybody explain why?  Not sure if his line of reasoning is that when you are about to reach the end of retirement, ************************, you have a high chance of dying at anytime so just let your risk tolerant ride???

actually as I’m writing this doesn’t sound too crazy, but I doubt this “your about to die” thing is the reason . . .

So you take Wade’s dynamic change in stock allocation along with modifying withdrawal rate depending on how the market is doing, we should not have to be too pessimistic and assume a crappy rate of return.  If we happen to get less than 5% real, well ************************, we can just roll with the punches and modify these two factors.

So I’m sticking to 5% real in my future value calculations.

Actually the real reason is b/c Jim Dahle does it!

Click to expand...

That is basically to get the best of all worlds. You have the better allocation for total return (more stocks) and protection around retirement and sequence of return risks (more bonds) but then decrease your longevity risk by again increasing equities. Similar to how the lifecycle investing works. Get equities early and heavy, increase bonds near retirement, after a bit, back to more equities.

[Tim]

Zaphod wrote:

That is basically to get the best of all worlds. You have the better allocation for total return (more stocks) and protection around retirement and sequence of return risks (more bonds) but then decrease your longevity risk by again increasing equities. Similar to how the lifecycle investing works. Get equities early and heavy, increase bonds near retirement, after a bit, back to more equities.

Click to expand...

I agree with the narrative. However, the concept of adjusting the AA based of an unknown sequence risk gives me pause. Eventually the sequence risk (hopefully) disappears. Again, narratively are you better off using a cash equivalent (1 or 2 yrs expenses) as part of the AA rather than the large shift in stock/bonds?

I struggle with the definition of how long and when the sequence risk needs to be addressed, (retirement, age, and duration) and how to adjust withdrawals (all from bonds or some of each stock/bonds). When will my sequence risk disappear?  Obviously no one has the answer, but somehow going to 80/20 to 50/50 and back to 80/20 has an awful lot of details that could have serious financial and behavioral impacts. In my mind, the sequence risk will be just as much at 60 as at 70. The narrative is great, but the devil is in the details. Random thoughts that anyone exiting the growth stage that has no answers.

How does a 70/25/5 compare over ones 30-40 year planning ? Not a challenge, its easier to stay the course.

[Zaphod]

Tim wrote:

Zaphod wrote:

That is basically to get the best of all worlds. You have the better allocation for total return (more stocks) and protection around retirement and sequence of return risks (more bonds) but then decrease your longevity risk by again increasing equities. Similar to how the lifecycle investing works. Get equities early and heavy, increase bonds near retirement, after a bit, back to more equities. 

Click to expand…

I agree with the narrative. However, the concept of adjusting the AA based of an unknown sequence risk gives me pause. Eventually the sequence risk (hopefully) disappears. Again, narratively are you better off using a cash equivalent (1 or 2 yrs expenses) as part of the AA rather than the large shift in stock/bonds?

I struggle with the definition of how long and when the sequence risk needs to be addressed, (retirement, age, and duration) and how to adjust withdrawals (all from bonds or some of each stock/bonds). When will my sequence risk disappear?  Obviously no one has the answer, but somehow going to 80/20 to 50/50 and back to 80/20 has an awful lot of details that could have serious financial and behavioral impacts. In my mind, the sequence risk will be just as much at 60 as at 70. The narrative is great, but the devil is in the details. Random thoughts that anyone exiting the growth stage that has no answers.

How does a 70/25/5 compare over ones 30-40 year planning ? Not a challenge, its easier to stay the course.

Click to expand...

These are all definitely soft and not well defined things. I've seen SORR being said as most problematic the five years before/after retirment. So some build up bonds or have that allocation during that time frame. Not sure if its a ramp up/down, static, etc...

[Larry Ragman]

Zaphod wrote:

Tim wrote:

Zaphod wrote:

That is basically to get the best of all worlds. You have the better allocation for total return (more stocks) and protection around retirement and sequence of return risks (more bonds) but then decrease your longevity risk by again increasing equities. Similar to how the lifecycle investing works. Get equities early and heavy, increase bonds near retirement, after a bit, back to more equities. 

Click to expand…

I agree with the narrative. However, the concept of adjusting the AA based of an unknown sequence risk gives me pause. Eventually the sequence risk (hopefully) disappears. Again, narratively are you better off using a cash equivalent (1 or 2 yrs expenses) as part of the AA rather than the large shift in stock/bonds?

I struggle with the definition of how long and when the sequence risk needs to be addressed, (retirement, age, and duration) and how to adjust withdrawals (all from bonds or some of each stock/bonds). When will my sequence risk disappear?  Obviously no one has the answer, but somehow going to 80/20 to 50/50 and back to 80/20 has an awful lot of details that could have serious financial and behavioral impacts. In my mind, the sequence risk will be just as much at 60 as at 70. The narrative is great, but the devil is in the details. Random thoughts that anyone exiting the growth stage that has no answers.

How does a 70/25/5 compare over ones 30-40 year planning ? Not a challenge, its easier to stay the course.

Click to expand…

These are all definitely soft and not well defined things. I’ve seen SORR being said as most problematic the five years before/after retirment. So some build up bonds or have that allocation during that time frame. Not sure if its a ramp up/down, static, etc…

Click to expand...

I'm not sure if it is mathematically that enlightening, but I read a mental gymnastics trick once that I use to ease my wife's concerns about retirement. Let's say after pensions and ignoring SS I need 100K per year throughout retirement. Just divide investments by years of retirement. If I want, for example, 30 years and I have $3M, voila! This does not account for inflation, but neither does it count SS or returns. My conclusions: if I have enough then a moderately defensive posture at retirement (50-50 or so) makes sense. Also, I'll probably do pretty well by, as Tim says, staying the course. In my case that is to apply the 3.5% rule and follow the Vanguard Target Retirement glide path.

[racelari]

What Wade Pfau mentioned is nicely summarized by Michael Kitces (who actually seems co-wrote the paper with Wade regarding this withdrawal strategy) in the following link: https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

It seems that this sort of change in asset allocation happens gradually if you use a bucket strategy of retirement withdrawal. You would have a short-term bucket made up of cash/bonds which you would withdraw first which then over time creates more equities as part of your asset allocation. The point is not to rebalance to an original asset allocation.  Seems these guys really believe this would make your money last longer and claim to have evidence to back it up.  Makes sense given no matter when the poor returns show up, you are fully avoiding SORR as much as possible as given this strategy you are delaying taking your equities to the end as much as possible.  It just might be weird as you might end up with 100% equities close to the end of retirement!

I for myself given this line of thinking might actually pump in more equities during bear markets during retirement by using social security income or selling off some bonds.  I know this violates Bill Bernstein's "when you've won the game, stop playing" though I don't think it does as I don't have crystal ball saying when I will die, i.e. you never really know when you've actually won the game.  If I remain healthy, seems I might have to get back in the game in case my retirement lasts more than the 30 years that I am planning on.

[Tim]

Larry Ragman wrote:

I read a mental gymnastics trick once that I use to ease my wife’s concerns about retirement.

Click to expand...

I used this since it was the result of the original 4% withdrawal academics. 25 years of comp saved invested at 60/40% lasts 30 years retiring at 65!

I love the simplicity of the math. 100/25=4%. I have used it enough my spouse nods and suggests WLI on me might be a good investment. Of course that might give her an incentive if she needed to use that healthcare directive, so no WLI! No plan or allocation will be perfect.

Actually, probabilities are rather interesting.

https://engaging-data.com/visualizing-4-rule/

[Allonblack]

I have a hard time seeing why anyone who believes in a 1% real rate of return would invest in stocks. Surely if the bar is that low you could hope to beat it significantly with real estate.

One thing I think yield + long term growth of the company misses is stock buybacks. They’ve largely replaced dividends, but still represent a return of capital to shareholders.

[CM]

Allonblack wrote:

They’ve largely replaced dividends, but still represent a return of capital to shareholders.

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Only if they reduce share count, rather than just offset dilution for stock options awarded to executives, and if the purchase is made at or below intrinsic value.

Intrinsic value is a judgment call rather than a well-defined figure, but companies buy lots of stock at market tops and virtually none at market bottoms. If the purchase was a wise use of funds in 2007, then it was a much better use of funds in 2009, yet buybacks dried up.

Read Buffet's approach to share repurchases for more.

[Allonblack]

It’s still a return of capital to shareholders if the stock is overvalued. It just might be a worse one than a dividend.