What rate of return to use?

cobson

Rather than model just one average rate of return, a useful feature of the software from https://www.flexibleretirementplanner.com is the Sensitivity Analysis tool. Using this you can see the likelihood of success across a range of values. For example, you can compare a range of expenditure levels vs. a range of average returns. The software uses Monte Carlo techniques to run thousands of simulations and produce a heatmap graph where, by default, dark green means >90% chance of success and red means <50% (these values can be changed to suit). Might be useful if you are unsure what rate of return to use.

Rowbo

cobson wrote: »

Rather than model just one average rate of return, a useful feature of the software from https://www.flexibleretirementplanner.com is the Sensitivity Analysis tool. Using this you can see the likelihood of success across a range of values. For example, you can compare a range of expenditure levels vs. a range of average returns. The software uses Monte Carlo techniques to run thousands of simulations and produce a heatmap graph where, by default, dark green means >90% chance of success and red means <50% (these values can be changed to suit). Might be useful if you are unsure what rate of return to use.

Wow, thank you. We will have a look at that.

k6chris

Anonymous101 wrote: »

I think that the 1-2% mentioned by others are extremely pessimistic compared to those discussed on other forums and articles.

It depends on what the purpose of your planning is. If the purpose is a competition to guess the real return from a balanced portfolio over the next 30 years, with nearest guess winning a new car, I would guess 2.5%. If the purpose is to make sound financial decisions on how much you need to save or can afford to spend then it is prudent to work on a lower figure, for which I use 1% above inflation (which I have at 2.5%). This way I hope to be pleasantly surprised rather than fighting an uphill battle in times of poor performance. Either way my personal view is that planning using a real return of 4%+ is optimistic to say the least, but this is one area where the debate is more art than science, so I have no problem with others having a different view (unless you are defending dischordant jazz music.....)

Thrugelmir

Anonymous101 wrote: »

I agree with your assessment of real rates of return. I think that the 1-2% mentioned by others are extremely pessimistic compared to those discussed on other forums and articles.

Being pessimistic means one is more likely to hit the personal objective. Being overly optimistic is far more likely to result in disappointment. Money driving markets higher has no correlation to the underlying trading performance of companies.

cjking

At current prices I have the return of the Vanguard world tracker ETF at 3.5%.This is based on CAPE, and is in effect the smoothed earnings yield (less fund charges and withholding taxes.)

Assuming VLS80 has returns of 80% of that would give an expected return of about 2.8%. I think you could round it up to 3%, for planning purposes.

To updated this figure, you could look up the CAPE for "developed markets" here

https://www.starcapital.de/en/research/stock-market-valuation/

to get a figure of 25.9. 1/25.9 gives a yield of 3.9%, subtract 0.4% for costs to get 3.5%, then knock of 20% to account for only being 80% equities.

JoeEngland

Linton wrote: »

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.

That's encouraging. I'm planning to give up work in 2 years and will be happy if investment returns merely kept pace with inflation on average.

DT2001

I think darkidoe is right in working backwards. I have worked out a basic budget and the balance of income generated would be for holidays etc. I also took into account eating into capital between !!!8216;early!!!8217; retirement date and State Pension. Once you have guesstimated see if a 1 or 2% real return would achieve that. You will obviously review regularly so can adapt accordingly. If returns are better will you retire earlier or build up a bigger pot? If retiring at 60 is the priority be pessimistic on returns and ensure as far as possible you achieve your goal.