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Bernstein suggests 3.5% real return for the S&P 500, a little more for international stocks.

I was wondering what various FIREd people here use for a planned expected annualized return on their investments?

Petey

I currently have my plan set up for a 6% return with 3% inflation. So I'm shooting for a 3% real return. If this things turn out better, I'll know waht to do with the extra dough.

Greetings Petey :)

On track for 4% 14 years down the road. But I expect that to be a soft number with the way things are changing. Could go up. Could go down.

Hey ES and Cut-Throat,

At the moment I'm working from Bernstein's information and looking at 3.5% real, less investing expenses. This was his low-end US domestic large cap return. He thought smaller cap and international would be better. How that pans out when your domestic is the UK, and international is Europe, US, Pacific Rim etc is a little less clear.

I'm trying to see whether I can push up the annualised expected return to 4% or 4.5% real, less expenses given that I'm mostly in the international section of his ideas. One possible global stock allocation is UK 70%, USA 15%, Europe 10% & Pacific Rim 5%, in order of currency risk and volatility. Bonds and cash are down at 1% real, split evenly between them, given that UK inflation protected bond is currently 2% real with the inflation portion tax-free and cash matches inflation. At present 3.5% on stocks less 0.58% avg expenses doesn't deliver more than 2.24% real on 65/35 portfolio. Most of the international ideas of future return were in the 4-5% region rather than 3.5%.

I'm presently reading thru Gillette Edmonds 'Retire Early, Live Well with less than a million dollars'. Says that 8% return can be planned, 8-12% okay, above that unlikely to be reliable. Makes no account for the dips in return while taking withdrawals and makes a point of saying assets will likely rise during retirement. This comes out what I see as a biased set of results having retired almost 20 years ago and stayed FIREd during the best 20 year results the market has ever seen. During that time of 16% avg return pre-costs, of course you can withdraw 8%, but who expects that going forward? Financial planners used that kind of math to advise people when they could retire, what happens to all those retired folks with bum advice? The planners were not necessarily even using historical return rates but current higher ones, we here are working from the opposite end on expected return based on overvaluation at some ends of the market and lowering expected return / withdrawals below average returns and way below what was possible in the past decade or so. Sort of makes me grimace. He has some other good advice though which follows some of what Terhorst wrote in his book.

Thoughts?

Petey

ElSupremo wrote: Greetings Petey :)

On track for 4% 14 years down the road. But I expect that to be a soft number with the way things are changing. Could go up. Could go down.

Greetings Petey :)

8% seems very high for planning purposes. Personally I would feel uncomfortable using more than 5%. The Edmonds book I haven't read. Next time I'm at the BS I'll check it out. Unless you don't think it's worth the time.

No one knows what's going to happen, and what kind of portfoilo will produce what kind of gains.

After the run- up of the market of the last 10 years, most savvy investers agree that returns of the last 10 years were unusual and that we won't likely see a repeat.

But here is a possible scenario. I still believe that the market is way overvalued (I am 50% in cash and 50% in the S&P 500)- I'm thinking the Dow should be around 7,000. If this economy does not start producing lots of good jobs the U.S. - this year's rally could be a bear market rally and the Dow could plunge to 5,000. Then the Market would be undervalued within 1 year and we could look forward to the 10% historical gains once again. - And I'd proablly be invested in the market at over 80%.

I have read various opinions and planning for a 3% real growth rate seems a bit on the conservative side, but I would rather be wrong and end up with too much to spend instead of to little. The 3% I am talking about is after inflation and expenses.

Modifying CT's response for my case: I currently have my plan set up for a 5% return with 3% inflation. So I'm shooting for a 2% real return. If things turn out better, I'll know what to do with the extra dough.

(In what follows, I repeat myself, but I think the question has come up before too. )

More specifically, I recompute (weekly!) what I can take from the retirement stash with the goal of stabilizing the purchasing power of that money over several decades. It turns out that my after-tax budget rises or falls about half as much as the market.

For the first nine years or so of my retirement, and for a few years before that, I planned on a 8% return and 4% inflation, producing 4% real return. I did much better than that, but all this doom and gloom talk around here has made me more cautious. I do not believe that real returns will be so low as my plan says. I can't believe that future decades will be so sharply different from earlier decades, but then, no crystal ball inspires much confidence in me. Actually, I trimmed my return and inflation expectations down to the point that the indicated withdrawal rate matched what I feel like spending currently. How is that for psychology trumping mathematics? With a 2% real return, my planned withdrawals for the next thirty-odd years are near the dividend rate on the S&P 500 where most of my equity assets are. Maybe I can go for decades without selling anything. Maybe. The intent is to get to age 95 with all the present purchasing power of the retirement assets intact.

My current planned withdrawal rates rise only to cover increased income tax liability. That liability rises because of mandated and increasing withdrawals from my IRA. The withdrawals look the same as the last time I posted them, even though the market is up for this year.

Age . . . . .Planned Withdrawal Rate (Average)

63 to 69 1.46%
70 to 79 1.61%
80 to 89 1.79%
90 to 94 1.91%

I have not made any effort to improve on market returns by any slice and dice policy, or attempting to "recognize currently undervalued sectors" by timely redeployment of assets from overvalued sectors. I don't know how to do that.

Hi ES,

So far I would say that it has some interesting sections to it that might be worth reading. Bits to do with reminders on not holding too many depreciating assets, keeping your expenses lean (avoiding "stuff" essentially). Talks about the cost of vacation homes and how it is cheaper to rent for a month than own for a year. (My feeling here is that I am interested in buying abroad in a sunny locate and the prices are rising 10-20% a year. So even though there are yearly maintenance costs after purchase, it may make sense to buy a future home to lock-in the price while it is still affordable. This would make the UK home the investment property as it is the one that would be sold ultimately. Many people in the UK are buying aboard, particularly Spain [taking a beginner Spanish course in October] )

Talks about the tax basis of investments or a business and the advantages/disadvantages there. Not usual to see that in a FIRE book but he was a tax guy.

Deals with asset allocations to provide diversification, lower risk and high returns later in the book. He also has a second book, Comfort Investing, I think. Thinks calculating the number of years of life is bad, live off the investment return above inflation. One key piece of advice that I think is possibly priceless is that he's known many people who cut back on their living standards in order to FIRE and it just didn't stick. They were miserable and went back to work. He says it is essential to establish the standard of living you are happy with while working and fund that in retirement. If it feels like a punishment to retire then it won't work. If you can balance that with living at a certain lifestyle and not raise it just because you got a raise, I think you'll get there in a more balanced way & have more success once FIREd from the sounds of it.

Generally aimed at ppl wanting to FIRE or already FIREd, so squarely at our interest group.

Petey

ElSupremo wrote: Greetings Petey :)

8% seems very high for planning purposes. :?Personally I would feel uncomfortable using more than 5%. The Edmonds book I haven't read. Next time I'm at the BS I'll check it out. Unless you don't think it's worth the time.

I enjoy your posts, Chips.

I see you as the Warren Buffett of our motley group.

Petey

therealchips wrote: I have not made any effort to improve on market returns by any slice and dice policy, or attempting to "recognize currently undervalued sectors" by timely redeployment of assets from overvalued sectors. I don't know how to do that.

Hi Cut-Throat,

I assume you are working on 3% real in the sense that you won't have a 100/0 stock to cash/bond allocation will you? Presumably cash and bonds won't deliver as much, thus dragging down the overall return on the total portfolio?

At the moment I've put down 3.5% less expenses, but 1% real on cash/bonds which drops the w/d to 2.24% at 65%/35%. Just think that sounds ridiculously low, esp. pre-tax!

Petey

Cut-Throat wrote: No one knows what's going to happen, and what kind of portfoilo will produce what kind of gains.

After the run- up of the market of the last 10 years, most savvy investers agree that returns of the last 10 years were unusual and that we won't likely see a repeat.

But here is a possible scenario. I still believe that the market is way overvalued (I am 50% in cash and 50% in the S&P 500)- I'm thinking the Dow should be around 7,000. If this economy does not start producing lots of good jobs the U.S. - this year's rally could be a bear market rally and the Dow could plunge to 5,000. Then the Market would be undervalued within 1 year and we could look forward to the 10% historical gains once again. - And I'd proablly be invested in the market at over 80%.

I have read various opinions and planning for a 3% real growth rate seems a bit on the conservative side, but I would rather be wrong and end up with too much to spend instead of to little. The 3% I am talking about is after inflation and expenses.

Greetings Petey :)

Thinks calculating the number of years of life is bad

LOL! So do I!

He says it is essential to establish the standard of living you are happy with while working and fund that in retirement.

This has been my philosophy since I was a teenager. I guess I should have wrote a book. This one sounds interesting I'll definitely check it out!

Thanks Petey!

assume you are working on 3% real in the sense that you won't have a 100/0 stock to cash/bond allocation will you? Presumably cash and bonds won't deliver as much, thus dragging down the overall return on the total portfolio?

I plan on having my asset allocation change with the times. Right now I am 50% stocks 50% cash because I believe the market is overvalued. If and when it becomes undervalued I will bump up my allocation to stocks. The 3% real growth plan comes because I want to be conservative with my projections. I hope I'm wrong and make a lot more money.

But having invested in the market for 20 years, I have got to beleive that there is a buying opportunity in out future. In other words I believe that the Dow will test 8,000 again in the next 2 years. I then will be over 80% in stocks.

I liked the gillette Edmunds book but he makes rental real estate sound too much like work

I enjoy your posts, Chips.

Thanks, Petey. I'm glad to hear it. My posts have been distinctly repetitious so I wasn't sure what reaction I'd get.

Hey Chips,

I agree with your comments but I like the consistency of what you write and can track your planning back, how it subtlely changes and how you respond to different situations & people in slightly different ways. Your situation is likely to be very different from mine but I think you can get something out of experiences even if they are very different.

Petey

therealchips wrote:

I enjoy your posts, Chips.

Thanks, Petey. I'm glad to hear it. My posts have been distinctly repetitious so I wasn't sure what reaction I'd get.

ataloss wrote: I liked the gillette Edmunds book but he makes rental real estate sound too much like work

Sometimes it is. At least if you're trying to do all the management and most repairs yourself. My last tenants at one of my low-end properties left me such a mess that, when combined with a lot of needed maintainance at that house, I've had steady part-time work all summer. Of course I've carved out time for fun, too.

I think I may sell that one and retrench a bit, though. I'm feeling streched thin on my time.

I have a few single families that are returning 6-8% (annual rents minus all expenes divided by current market value). It gets taxed as ordinary income (28% federal; 5% state) so that leaves ~ 4.6% ... minus inflation to get a "real return". Wow, not much left !

I guess it's all about the property appreciation.

TRyan wrote: I have a few single families that are returning 6-8% (annual rents minus all expenes divided by current market value). It gets taxed as ordinary income (28% federal; 5% state) so that leaves ~ 4.6% ... minus inflation to get a "real return". Wow, not much left !

I guess it's all about the property appreciation.

But you ignore the fact that rents should increase approximately with inflation. So, that 4.6% is approximately a real return after all. Plus any appreciation over inflation. And of course I don't need to mention that judicious use of leverage can increase real return further.

And of course I don't need to mention that judicious use of leverage can increase real return further

Yes, if I divide by my purchase price (or better yet - deposit) then the returns are much higher. But I think it helps to understand what todays returns are in todays dollars (to determine if the investment is in the right place). For example if property values increased faster than rents, at some point one would realize "time to sell ... even if I put the proceeds in TIPS I am better off".

Good catch on the inflation (I've been raising rents more than inflation for years) !

TRyan wrote: But I think it helps to understand what todays returns are in todays dollars (to determine if the investment is in the right place). For example if property values increased faster than rents, at some point one would realize "time to sell ... even if I put the proceeds in TIPS I am better off".

Very true. It's an important and worthwhile exercise.