What rate of return to use?

Rowbo

Hi there, we are having a bit of an overhaul of our pension contributions. As a VERY rough rule of thumb, what kind of rate do you use for future returns. We have some investments in VLS80 and some in a works DC scheme where we selected a similar risk to the VLS80 - but i don’t remember the actual fund.
We are 42 and looking to retire at 60. I have tried some online pension calculators but from what I read on here they are pessimistic.
I realise that there a no guarantees and none of us can predict the future but there must be a general rate that people use for their calculations?
Thank you!

Linton

13 years ago I took early retirement on the basis of 4% investment return and 3% inflation - ie 1% real return. These figures have turned out to be very pessimistic even with the 2008/2009 crash. However I am still using them for my ongoing plans.

lisyloo

I am using 7% but my portfolio is aggressive and I understand it might be wrong and I'm not making any major plans on the forecast.


Given it's easy with excel spreadsheets these day you could have several %'s.

somethingcorporate

It frustrating not to have more certainty at such a way out. We are pension planning at mid-30s and the difference between 1% real return and 5% over 20-30 years double the size of the pot. Not easy to plan when such a small % change makes such a monumental difference.


Anyway, I am planning on roughly 1.5% real return and hoping for the best!

Rowbo

Thank you! So the 4% (real return) in my head was a bit optimistic by the sound of things. Wow, we are going to be working forever!

somethingcorporate

Rowbo wrote: »

Thank you! So the 4% (real return) in my head was a bit optimistic by the sound of things. Wow, we are going to be working forever!

I wouldn't say it was too optimistic but as per the above advice, do a bit of modelling and try different %s.


My experience from having a DC pot for the last ten years is the growth has been amazing. 1/3rd of my pot is growth. I've recently switched funds that have grown 13% in three months but I've been lucky at the global bull market over the last decade. I also look forward to a few longer term dips to buy some cheaper units!



The fact that you are already looking at it, thinking about it and planning means you are doing better than most and wont be working forever.

Triumph13

Historically the UK stock market has yielded something in the region of 5% pa real returns. The US market more like 7%. In that context I would say 4% pa real is not an unreasonable figure to use for a global tracker. Don't forget to allow for costs though.

Rowbo

Thank you both. Maybe we will try 2 or 3% for our calcs then and hope it works out better.

somethingcorporate wrote: »

The fact that you are already looking at it, thinking about it and planning means you are doing better than most and wont be working forever.

Thank you for this comment. I just wish I knew about all !!!8216;this stuff!!!8217; back when we started out on this adulting!

Thrugelmir

Triumph13 wrote: »

Historically the UK stock market has yielded something in the region of 5% pa real returns.

For the past few decades far lower taken as a whole, and that's with income reinvested.

ex-pat_scot

Long term equities real rate of return is approx. 5%
Long term 50/50 equities/bonds rate of return is approx. 4%


http://monevator.com/uk-historical-asset-class-returns/
gives a pretty decent framework.


But what to use in planning?


Frankly I use 5% as the mean best estimate, then do scenario analysis for various real rates from 0% to 10%, to model the size of my pot under the various investment regimes.
This then gives me the range of pot values and then the choice:
- do I continue until i reach my desired pot value (/retirement income)?
- do I stop and merely accept whatever pot value / retirement income I get at that point?
- what will ACTUAL returns and pensions / tax regime do to my behaviour? (ie will i change my asset allocation, risk appetite, amounts contributed each month)


I am aware that the last few years have been rosy, and 5% real rate has been very pessimistic in practice. Much of this is due to the last 2 years and the Brexit devaluation of the £ and consequent leap in value of my global trackers. Whether this is sustainable or not, I will continue on my broad global equity strategy and 5% real return assumption, and will monitor occasionally to see where I am actually landing.

Linton

I would be wary of using a mean estimate. Even if the future does mimic the past, 50% of the time you are going to be disappointed.

ex-pat_scot wrote: »

....

I am aware that the last few years have been rosy, and 5% real rate has been very pessimistic in practice. Much of this is due to the last 2 years and the Brexit devaluation of the £ and consequent leap in value of my global trackers. Whether this is sustainable or not, I will continue on my broad global equity strategy and 5% real return assumption, and will monitor occasionally to see where I am actually landing.

This is vital - review the plan against reality at least once a year. If you are going off course you should then be able to apply corrections or change the plan.