How to Estimate Future Returns in Retirement
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- Опубликовано: 28 май 2024
- Our retirement plan's chance of success depends a lot on assumptions we make about future investment returns. In this video, I walk through my approach to this issue.
Empower: robberger.com/empower
New Retirement: robberger.com/new-retirement
Vanguard Returns 1926-2022: investor.vanguard.com/investo...
FICALC: robberger.com/tools/ficalc/
Portfolio Visualizer: robberger.com/tools/portfolio...
Kitces Article: www.kitces.com/blog/monte-car...
Key Takeaways from the video:
--A retirement plan’s chance of success is sensitive to our Investment return assumptions. A small change in return assumptions can significantly affect our plan’s chance of success.
--All return assumptions rely, in whole or in part, on historical returns. At one extreme, we can run simulations based entirely on historical returns, as Bill Bengen did in his 1994 paper that gave us the 4% rule. This is also how some retirement calculators work, such as Ficalc.
--Alternatively, we can use Monte Carlo simulation to model future outcomes, which rely on our average return and volatility, again based on historical results.
--Whatever approach we use should account, at a minimum, for our portfolio’s asset allocation. A 100% stock portfolio should have different return and volatility assumptions than a 60/40 portfolio. The better approaches should also account for current market conditions.
It’s rarely ideal to use just one return assumption. Our assumptions should change with changes to our investment plan and to reflect different economic regimes. For example, the current high valuations suggest that future returns over the next decade will be lower than historical averages. Our retirement plan should reflect this reality.
0:00 - Welcome to the Financial Freedom Show!
0:52 - Historical returns
1:49 - FiCalc
2:39 - Empower
4:56 - Coming up with a number
6:50 - Portfolio Visualizer
9:06 - New Retirement
9:41 - Optimistic/Pessimistic return
14:57 - FiCalc/Increase withdraw amount
18:18 - Sequence of Returns Risk
22:02 - Assumptions
25:21 - Better or worse
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
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No medal required for staying the course, Rob! Your videos distract me very nicely during my morning cycling and rowing routine!
Thank you for this helpful video Rob. Every time someone shows the New Retirement estimated returns and inflation settings I've wondered about a reasonable approach to them.
Excellent example video for stretching out the capacity of NR. The one thing I would change is that, I think, SS growth should always be set at inflation rate. I can't imagine a scenario where this diverges significantly.
Thanks for the guidance with NR. I’m only 1 week in and this information is invaluable. More like these please.
I watched a few of your videos today and now subscribed to your channel. Love how you discuss these financial topics. I’m early 40’s but very interested in how to plan for retirement. Thank you for showing demo and specific scenarios!! Too many channels are so vague and seem to say generally the same generic stuff. The specifics in how you think about it and how you use the tools is sooo helpful! Thank You!!
Very helpful video. I am always very conservative in my assumptions (using much less than historical returns). It is a good idea to plan how you would react if things still turn out worse than assumed (eg cut my travel expenses by X%, replace the car 10 yearly rather than every 5 etc.) and basically see what would be required to scrape through.
It is also instructive to look closely at the FiCalc results. Sometimes a 'failure' is only at the margins (eg you run out of funding at year 29 rather than year 30) and some life style adjustment could easily get it back on track. We can do a lot in adversity!
Very timely for me. And your methods extremely useful. Thank You!
Very thorough explanation, Rob. My pension is modest and my savings are too. I use 5% future returns on pre tax and 6% on a Roth that is 100% stocks. Sleep well at night.
The problem sir, is what do you do if real inflation stays at 7-12% for the next 10 yrs? no ones retirement plan can work if that ends up being reality and unfortunately, unless something drastic changes, my inflation numbers might be low when our govt is deficit spending $1T every 100 days.
Contender for best RUclips channel... ever. Very grateful for you Rob.
Thanks for your video explaining how to look at the what ifs.
Great video, I really like the way you present and explain how you arrived at your conclusion. Thanks!
Rob, this video has unlocked even more value to me from NR. Well done!
Nice overview, thanks!
It's interesting that Vanguard projections for returns the next decade is much lower for stocks and higher for bonds than historical averages. They also believe foreign stocks will do well. Of course, no one can predict the future, but these projections can help inform decisions going forward.
Congrats on 200K Subs Rob!!!
always good info from you. thanks
Thanks Rob!
God bless you for so many useful no non-sense financial videos.
Thanks Rob. I was just working on my returns per account ratios. You must of read my mine. Great video.
PORTFOLIO VISUALIZER is also helpful. Always project on a conservative basis 3-4 percent and plan accordingly
Do you pay for the subscription? I didn't realize until after a couple weeks of heavy use that I was on a free trial 😂
I think a 3-4% net of inflation return is probably unrealistic in todays environment - you better have enough money to withstand a negative return for 5-10 YEARS in retirement or you will be going back to work - NO ONE (me included) wants to face this likely outcome but good God look at what our govt is doing to the dollar... does no good to be pollyanna when so much empirical data is available that says the absolute opposite - plan accordingly! how when you have already retired? go learn a marketable skill RIGHT NOW that you can use to survive if this actually happens.
Great information and calculators. One of the "assumptions" not mentioned is the changes in behavior (eg. changes to portfolio allocations) that would likely come during changing times. For instance I would like to test whether or not a "reverse" TDF glide path (eg increasing stock allocation), rather than a static one might be one way to approach a portfolio "sequence of return risk", while maintaining growth of the portfolio in later years.
I have been looking at the Case Schiller CAPE chart - if pe20 then -1 to 6% with mean at 5.3% - we are CURRENTLY AT 32! so I have been using 5.3 - 5.4% AVERAGE of next 10 yrs - unfortunately we're getting TRUE inflation in the 7ish percent range so we're going to be challenged staying ahead of inflation with equities over the next 10 yrs
The most REALISTIC view of returns and inflation going forward have to include what REALLy happens at the end of a debt supercycle - which is what IS happening - you cannot use equities (US) to count on beating inflation - the FED is going to print us into oblivion - they have NO CHOICE - for the dollar its INFLATE OR DIE in a debt/credit based economy - sad but true - google investing for STAGFLATION, its exactly what we are heading into.
What can you do about it? - keep working! retirement is a very recent phenomena - most of our elders worked until they died or were physically disabled and had to stop working - ugly but if you are REALLY honest about what has happened we will NEVER be the worlds manufacturer again the way we were in post WWII - we've been living off that legacy the last 70 yrs and its run its course
@@agates9383 Lol ok. The top companies in the world are in the US. Keep working until you die though.
@@agates9383 Great comment! I agree 100%. I'm 60 and more and more of my friends are retiring or did so several years ago. But I continue to work. Work keeps you sharp, gives you mission and purpose, and provides essential socialization. It is also a great way to kill sequencing risk. I keep in great shape so I don't feel like I'm losing life-years. My mother's is the last generation to enjoy 30-35 year retirements in comfort. Very anomalous.
Don’t lose sight of the fact that PEs across the Atlantic are 11-15. Hence the diversified portfolio!
Honestly if one thinks inflation is going to be bad in future then prepare for it. TIPS are yielding good. Nominals are >4.5% so keep part of your expenses on those.
Very timely topic. have an AUM portfolio I just took back that has over 20 funds 70/30. I'm struggling to figure out how to model my rate of return in NR.
I went into each of my accounts and obtained the actual performance of that account over my investing life. I then created a weighted average of my performance across all accounts over my investing life. I use this as my optimistic return in NR as I expect to become more conservative in retirement. Then I used the average rate of inflation over my lifetime as the pessimistic value in NR. Average in NR is just the midpoint between optimistic and pessimistic. That's my baseline. Then I create scenarios from that baseline to test.
Rob, thanks for the discussions of future returns. In my DYI modeling, I use "present" dollars to make it easier to interpret future results -- based on an inflation-adjusted rate of return [(1+grossReturn%)/(1+inflation%)-1]. As you suggest, if you have different classes of asset allocations, it may be helpful to model them separately with different gross return assumptions. This is especially the case because a dollar may not be a dollar (pre-tax 401K dollars are worth less than Roth dollars because of their carried tax burden). For people who own their homes, how do you adjust/interpret annual inflation, given that housing accounts for as much as a third of the "market basket" used to calculate the inflation rate? Does this imply that when housing costs are increasing, inflation for home owners is actually somewhat lower than the CPI?
Different question/issue: Have you modeled the impact of a period of recession and negative returns on the cost of per-tax 401K to Roth conversions? Without Roth conversions, our RMD-fueled tax burden will be high. We plan on financing our Roth conversions from our after-tax investment account, where we have converted 4 years of living expenses + Roth conversion income tax expenses into a bond latter (to ensure we have $$ we need regardless of our after-tax return). The way I've thought about it is twofold. 1) If we get a good inflation-adjusted return over the next few years, great! We have more money. 2) If there is an economic slump and our 401K investments fall in value, great! Our budget will move a higher % of our investments into Roth -- where they will recover value over time... or so we hope. While this Great: Great thinking reduces my investment anxiety, does my thinking make sense? (And do I really want to know if it doesn't make sense...?)
Excellent discussion Rob. I use both of these tools and frankly, never tought of using NR in a way to model a future rate change down the road. You gave me a new way to look at things and I really appreciate it. Now I'll go play with NR. Thanks Rob. Larry, Central Valley, Ca.
I would like a video titled "Where to invest if you are retiring in 2025 and you think we are entering a regime like the beginning of the 1970s and want a 95% Success Factor with $80K income requirement". I'll have to try to figure this out myself I guess. Thanks for your work!
Thanks, Rob. Excellent video. One of my favorites so far. I like the links for the tools too. I could be wrong but, in New Retirement, I think your assumption for SS COLA is backwards. Shouldn't the optimistic value be the higher of the two?
That's a good question. "Technically" a higher COLA would basically mean inflation is pessimistically high. If, personally however, pessimistically means less money in your Social Security check, then you would be right. I feel it all depends on how you want to have the tool reflect it. (IMHO)
I had a similar question and reached out to the folks at New Retirement. This is what they sent to me:
These are the rates used as defaults in the Planner.
Rates of return
Optimistic: 5% Pessimistic: 2%
Work & Passive Income Growth:
Optimistic: 3% Pessimistic: 2%
Pension COLA:
Optimistic: 0% Pessimistic: 0%
General inflation
Optimistic: 2% Pessimistic: 3%
Inflation Data
Social Security COLA
Optimistic: 2% Pessimistic: 0.5%
Housing Appreciation:
Optimistic: 3% Pessimistic: 2%
Medical inflation:
Optimistic: 2.5% Pessimistic: 5.5%
Rob, I was hopeful your intro on caveats was going to pan out in your video, but I didn't really hear it.
You could just change assumptions for every year rather than the historic average of NR default, which is basically what Kitces' article you mentioned comes down to. Even then, it still fails to predict the future, it can only tell you what could have happened in the past if your hypothetical assumptions panned out in the past. These tools are only useful to the extent they show you how your assumptions could impact a portfolio. Because of this, people ought to measure their outsized confidence and faith in the predictive nature of these sim modeling tools.
In watchig this video, it dawned on me the same people advocating the merits of NR and the like are the same ones who loudly criticized Dave Ramsey (you included) for his comments about average RoR and withdrawal comment that upset the internet. The criticism held Dave assumed a linear historic average return. Yet, NR and the like base a historic outcome on a linear historic average RoR. Sure, you can input an optimistic and pessimistic numbers to get you an outcome band, but there is really no distinction to what Dave said. For example, your inputted optimistic RoR of 9% assumption is literally taking the linear historic average RoR over the 30yr period and making it your optimistic assumption. You didn't choose 36.7% high for optimistic and -26.6% low for your pessimistic from that time period after all. Other than his 12%+ RoR average on his mutual fund comment, there is no difference in Dave's lineaer historical average RoR comment than paying $120/yr for NR or 1%AUM fee to a FA to generate the same linear historic average RoR based outcome.
I don't understand why people use 2% inflation, since the historic average has been 3.3%. 3.3% would seem like a more logicaloptimistic assumption, since it has been the historic average floor. 2% inflation was a Bernanke made up number from 2012. I also don't know why people use 30yr projection when the average life expectancy is 77yo plus or minus for male and female when starting retirement assumption at 62-65yo. NR and the like don't weigh the probability on the accuracy of your assumptions.
There may be a patterns of x and check marks, because they reflect what the market and rates were doing. Not shocking. However, the historic patterns are not predictive just like playing baccart believing a historic pattern of dealer wins means player wins on the next and subsequent plays has a high probability or has to occur.
If you continually change assumptions to adjust to the conditions, you are doing what Kitces' is arguing, except you would also need to weigh the probabilities of each assumption rather than equally weighing like NR and the like does. Even then, the modeling isn't predicting, it is just giving you an outcome based on last year's conditions as somehow indicative for the upcomming and subsequent years. That's the only real problem I see in Kitces' conclusion. You can change your assumptions all you want but that doesn't change the probability, just like your probability of winning the lottery doesn't increase buying more lottery tickets.
You kept saying NR demo account, when you mean demo scenario. NR doesn't allow you to adjust assumptions like rates unless you pay and upgrade to PlannerPlus.
Life expectancy at age of retirement is going to be later than life expectancy at birth.
If you make it to around 60, you are more likely to live longer than average.
@@erickarnell this is nonsensical without framing more. Life expectancy is overall life expectancy not probability of living the next year. I don't know what your average means. Less than half men at 60yo have reached 80 while just over half of women have. Combined, the average is 78yo. Shocking the break even point is around 78yo for ss. Probability rapidly drops after 80yo, so blanket modeling 30yrs to 90yo is absurd, especially if you take your individual demo into consideration.
You’re all over the place. Too many gripes; long-winded and very repetitive with your historical returns aren’t predictive of future returns mantra.
VERY well done - thanks!!
I deserve a medal! 🤣 I learned a little from this video! Thank you so much! Absolutely love NewRetirement!!
Hi Rob, great channel and appreciate all the knowledge you have been sharing with us. I am trialing New Retirement and there is not any way to model dividend and interest income from my investments as that feature is not available. I researched it online and out of the several options, the best way is to derive the total monthly number off line (spreadsheets) and then enter it into passive income. When I do this, it really adds a lot to the assets and the % success is pegged at 99%, even with pessimistic. This result seems extreme and not correct. I am making the income close to my monthly needs from dividends and interest. So, I see in principle it should show a decent % of success, but not so optimistically. What are your thoughts on this? Is there a better way? How are you modeling it. I believe you say you have a 60/40 portfolio. Do you reinvest the interest, or do you distribute them as income?
Thank you, Rob. I've been using New Retirement for a month now, and it's helped so much with my long-term planning in retirement. Can you please confirm that your Social Security assumptions are correct? There are a few of us here who are confused about why your Optimistic assumption is lower than the Pessimistic. Thanks!
I reached out to the folks at New Retirement. This is what they sent to me:
These are the rates used as defaults in the Planner.
Rates of return
Optimistic: 5% Pessimistic: 2%
Work & Passive Income Growth:
Optimistic: 3% Pessimistic: 2%
Pension COLA:
Optimistic: 0% Pessimistic: 0%
General inflation
Optimistic: 2% Pessimistic: 3%
Inflation Data
Social Security COLA
Optimistic: 2% Pessimistic: 0.5%
Housing Appreciation:
Optimistic: 3% Pessimistic: 2%
Medical inflation:
Optimistic: 2.5% Pessimistic: 5.5%
Hi Rob, new listener here and appreciate the knowledge share. I have been somewhat on edge about my choice in FXAIX as my core holding when looking at the historical Performance of FTEC. I feel like I have left a mountain of returns on the table by not having FTEC as part of my core holdings. I know FTEC is a sector fund and not a broader market fund but what are your thoughts on these technology funds? What place should they hold in one's portfolio? Seems like they have ran away with the returns during each incremental time period. Thank you.
It would be useful to know which Monte Carlo simulation is used in New Retirement. Also, what criteria is useful to pick the time for a regime to model.
it's pretty clear it uses historic linear average. Rob used 9% rounding up from the linear average over the 30yr period as his optimistic, and a lower linear % for pessimistic.
Have to estimate using real data to simulate sequence of returns. I used the worst thirty year period I could find: 1967-1996
I have bought 30 year tips that pay 2.15 over inflation.. how does new retirement figure THAT rate of return? I have 10 year MYGA that pays 6%.. how does that get figured in ? I can get an annuity at 68 that pays 7,000 a year on 100k for 20 years , or life , whichever is longer .. how does that get figured in? Shouldn’t we look at after tax and after inflation returns total for best planning?
Contrasting the free versions of
New retirement, empower and portfoliovisualizer
1. Can any of these platforms project portfolio growth into the future
2. What type of portfolio analysis or projection is each free platform best at
3. If you are going to upgrade to the next price step - which platform would you subscribe to for portfolio future projections
Rob covered your questions in previous videos. He has endorsed New Retirement, I have their free version only.
The average Future Returns are almost completely irrelevant to how much you can actually reliably spend in retirement. Kitces has shown that there is basically NO correlation between real returns over 30yrs that ranged between 4% and 12% and the SWR that those starting portfolios were able to sustain. The sequence of those returns in the early years are what made all the difference.
Wow that is fascinating!
source please?
What do you mean by "SWR" in the above?
@@tboughnousafe withdrawal rate?
I think this is the wrong conclusion for that article. Historical 30 year real returns returns were shown to be weakly correlated with the safe withdrawal rate. However, consider this scenario: all historical returns are cut in half. While there would still be very little correlation between the safe withdrawal rate and 30 year returns, of the safe withdrawal rates would obviously be significantly reduced. So future estimated returns are important, they just tend to be swamped by the noise of sequence of returns risk in historical data. But that is presumably being covered by the Monte Carlo aspect of the planning tool, so all you have to do is get a good estimate for future returns and sequence of returns risk gets factored in automatically.
Rob: your SS COLA Pessimistic is set at 4%. Shouldn't that be a smaller number than the Optimistic, which is set at 2%?
No. SS COLA will be based on inflation rate. So, when inflation is low, COLA is low and the opposite. So, if you are getting a "good" COLA it is because inflation is "bad"
I had the same question and reached out to the folks at New Retirement. This is what they sent to me:
These are the rates used as defaults in the Planner.
Rates of return
Optimistic: 5% Pessimistic: 2%
Work & Passive Income Growth:
Optimistic: 3% Pessimistic: 2%
Pension COLA:
Optimistic: 0% Pessimistic: 0%
General inflation
Optimistic: 2% Pessimistic: 3%
Inflation Data
Social Security COLA
Optimistic: 2% Pessimistic: 0.5%
Housing Appreciation:
Optimistic: 3% Pessimistic: 2%
Medical inflation:
Optimistic: 2.5% Pessimistic: 5.5%
Seems bottom line is how you feel = how you feel. Your assumption twiddling is dictated by your fear factor.
Great video Rob. Have you checked Mike Greene's work on Index bubble? Any thoughts?
I am projecting 55% returns.
How much of your retirement money that you need to live should you invest in stocks and bonds?
I heard not to invest money you cannot afford to lose in the stock market.
🤘
When you say “he didn’t make an assumption”… yes he did. He assumes that historic returns are representative of future returns in his simulations
I think he’s saying that YOU don’t have to make any assumptions. Obviously the platform does, but at least that’s professionals making it
Momento mori
This doesn’t make sense. You use the historical average as your “optimistic“ return, but for inflation, you take almost the exact opposite approach.
Historical inflation has been at 3.5% but your “pessimistic,“ worst-case scenario is 4%?? Lol, worst-case inflation can be a hell of a lot more than 4%.
Folks, You do you realize that no retirees, not even one person, does any of this stuff to live and plan their finances.
None. Nobody! 😊
Wrong! 😊
I’ve implemented many scenarios in my retirement plan/tool but then I ask myself what am I supposed to do with all this modeling? I’m 71 and my wife is 72 and we have $80k + COLA annually of Social Security guaranteed for life along with our portfolio distributions. Am I supposed to change my investment allocations because of these play toys? All this modeling results in a big So What?
Happy for you-not everyone is that fortunate.
If you don’t need your portfolio to fund your mandatory retirement expenses, you are right, returns don’t matter. Most retirees are not so fortunate.
You may not need to change your allocations but, as a new widow I would like to remind you that when one spouse dies the other will be left with half of the Social Security money, and all the bills (just something to think about)
Youre going to be dealing with RMDs soon but if everything is working and you have enough to 85-90 regardless of what the mkt or inflation does I wouldnt change a thing - BUT, you MAY want to look into inflation protected immediate annuities (expensive) if you might need more guaranteed income in later yrs
@@tboughnou AND a huge tax bill no longer filing jointly - in ALL of these retirement planning software programs theres a HUGE spike in taxes when the first spouse dies
I am thinking Ouija board.
listen to The Exorcist Files podcast and you might change your mind about the ouija board😇