Spreadsheet planning assumptions

cobson

Wade Pfau writing back in 2013 said that he himself uses a 2% real return in his own spreadsheets:

https://www.marketwatch.com/story/debunking-the-myth-of-the-8-return-2013-02-27

Later he went into more depth, and table 2 of the following article might be of interest:

https://www.advisorperspectives.com/articles/2014/07/01/new-research-on-how-to-choose-portfolio-return-assumptions

He makes a distinction between the rates to use during accumulation and decumulation due to sequence of return risk with the latter. His figures here are 2.3% during accumulation and 1.9% during decumulation, at a 90% confidence level (i.e. actual results should be better 90% of the time, worse 10% of the time).

I guess that they key is to decide what level of confidence you are happy with. One poster above modelling a real return of 0.5% above inflation has around a 98% chance of beating that; another poster modelling 5% above inflation is closer to a 50% chance of beating that.

ex-pat_scot_2

cobson wrote: »

I guess that they key is to decide what level of confidence you are happy with. One poster above modelling a real return of 0.5% above inflation has around a 98% chance of beating that; another poster modelling 5% above inflation is closer to a 50% chance of beating that.

Consistent with my long term figure of 5% long term mean real return: by definition there's a 50% chance of being better (or worse) than this figure.

cobson

Yes, its all down to what question you are asking of your spreadsheet. You are asking it to show you average returns, so 5% works for you as you are aware that there is a 50% chance of not achieving the figure shown.

Someone else might be asking to see how much they need to save to be 90% sure of achieving a certain income in retirement, so 2% would work for them. Horses for courses.

OldMusicGuy

michaels wrote: »

I think any future visibility on inflation is zero

I'll disagree with that as a 62 year old with a background in economics The BoE has an inflation target and it's unlikely to diverge significantly from that in the short term. Also, as someone that lived through the high inflation times of the 70s I think it's highly unlikely we see those circumstances repeated (for example, I studied prices and incomes policy as part of my degree course, very relevant that turned out to be in the intervening years....).

The main reason I include inflation is that I hold a lot of cash in bond ladders (and as cash) to minimise sequence of returns risk and I need to model the impact of interest rates on that cash lagging behind inflation. That has an impact on my cash holding strategy.

Alexland

Sunnylifeover50plan wrote: »

Investment return, appreciate this is tricky but assuming a 3 or 4 out of 7 risk rating - 20 to 40% equities and mixed bonds/ gilts (Vanguard LS20 & 40) net of fund/ platform costs.

Why not use Vanguard's own 10 year estimates for UK investors of between 0.5% and 1.5% (average 1%) nominal return on UK or global bonds and between 3.5% and 5.5% (average 4.5%) nominal return on global equities.

https://www.vanguard.co.uk/adviser/adv/articles/research-commentary/markets-economy/global-outlook-summary-2020

So VLS40 might return (60% x 1%) + (40% x 4.5%) = 2.4% before fund & platform fees so might not even keep up with inflation.

Alex

pensionpawn

I'm knowledgeable about finance, probably more than most, though no doubt much less than those on this forum. What I find hard to accept (understand) is using a pension growth figure which is arguably only slightly more than rates achievable on significant cash deposits. My pension, not including contributions, grew 15.5% in the last 12 months. Over the last 5 years my growth (not including investments) has been around 6%. I appreciate that a single year view is unwise and a longer term view is more advisable and past performance is no etc.... However surely you peeps, much more experienced than me, must be seeing growth in your holdings higher than mine, and hence should be using less 'conservative' growth forecasts? The risk of using such low growth figures is that you push yourself longer and harder for that higher pension pot valuation at the risk of health failing partially, or totally! I have started to move around 50% of my pension(s) into a SIPP and have witnessed much better growth as a consequence and am now using 10% as a future guideline (eg., Fundsmith / Lindsell Train Global 19% pa average). Perhaps I'm wildly wrong, however I'm not convinced by growth rates < 5%

michaels

cobson wrote: »

Wade Pfau writing back in 2013 said that he himself uses a 2% real return in his own spreadsheets:

https://www.marketwatch.com/story/debunking-the-myth-of-the-8-return-2013-02-27

Later he went into more depth, and table 2 of the following article might be of interest:

https://www.advisorperspectives.com/articles/2014/07/01/new-research-on-how-to-choose-portfolio-return-assumptions

He makes a distinction between the rates to use during accumulation and decumulation due to sequence of return risk with the latter. His figures here are 2.3% during accumulation and 1.9% during decumulation, at a 90% confidence level (i.e. actual results should be better 90% of the time, worse 10% of the time).

I guess that they key is to decide what level of confidence you are happy with. One poster above modelling a real return of 0.5% above inflation has around a 98% chance of beating that; another poster modelling 5% above inflation is closer to a 50% chance of beating that.

pensionpawn wrote: »

I'm knowledgeable about finance, probably more than most, though no doubt much less than those on this forum. What I find hard to accept (understand) is using a pension growth figure which is arguably only slightly more than rates achievable on significant cash deposits. My pension, not including contributions, grew 15.5% in the last 12 months. Over the last 5 years my growth (not including investments) has been around 6%. I appreciate that a single year view is unwise and a longer term view is more advisable and past performance is no etc.... However surely you peeps, much more experienced than me, must be seeing growth in your holdings higher than mine, and hence should be using less 'conservative' growth forecasts? The risk of using such low growth figures is that you push yourself longer and harder for that higher pension pot valuation at the risk of health failing partially, or totally! I have started to move around 50% of my pension(s) into a SIPP and have witnessed much better growth as a consequence and am now using 10% as a future guideline (eg., Fundsmith / Lindsell Train Global 19% pa average). Perhaps I'm wildly wrong, however I'm not convinced by growth rates < 5%

If you look at the second Pfau paper above he makes an argument for using for example the 10th decile of returns in a monte carlo simulation as whilst of course the median outcome will be the 50% decile (and the mean possibly even higher) what matters more to an individual is avoiding the 'possibility of failure/running out of money' than this likely median performance.

Seems to me there should be scope for a product that allows the investor to trade some of the upside performance against the risk of being one of the unlucky ones who hits a bad year for sequence of return risk but the only options for this seem to be a DB pension (not widely available) or an annuity which seems very poor value. Perhaps this implies that the only way to achieve certainty is by accepting a return that is in the 5th or 10th decile - which in turn validates the approach of using this return for modelling purposes?

AlanP_2

Many people on here will have seen growth like yours, or even better PP as you say but not everyone has the same attitude to the risk they are prepared to accept.

Some will have an amount covered by a guaranteed income source, the SP for example. Others may be retiring at 55 and not getting any guaranteed income for 10 years.

Markets have had a long run of good returns over the last 10-12 years since the GFC. Is it logical to assume that those levels of return will continue in to the future?

The safer option is to assume that there will be a crash the day after you retire and that long term returns are below that we have seen in the last decade or so (supported by Central bank / Gov policy remember).

Handing in your notice and sailing off in to the sunset is a big decision, both financially and emotionally, and for may could be very difficult to reverse if things go pear shaped.

OMY syndrome possibly, and with hindsight pots that were larger than required but better than the alternative.

Alexland

pensionpawn wrote: »

Over the last 5 years my growth (not including investments) has been around 6%

This has been during a positive period in the economic cycle, supported by the devaluation of the pound and low interest rates pushing asset prices high relative to their fundamental income streams. In terms of future growth potential that's a really bad starting point for this new decade. You cannot eat the same piece of cake twice.

Alex

Mick70

I have no idea if mine is realistic enough .
I have my pot growing by 2% pa (I assume slightly pessimistic but who knows).
Come drawdown in few years time I use a safe(ish) withdrawl rate of say 3%, with the pot balance continuing to grow at 2% pa .
I'm not knowlegeable enough to know what other way to do it really