Author Topic: What percentage growth rate to use to project savings?  (Read 1318 times)

joenorm

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What percentage growth rate to use to project savings?
« on: January 06, 2022, 05:53:05 PM »
Hi All,

I'd like to be FI within a 10 year period. It looks possible depending on how I play my cards.

I am wondering what %rate you all use to project growth? Assume 100% VTSAX in this case.

When I play around with a simple compounding interest calculator that rate obviously changes outcomes significantly.

I started with 7% but is that too high? Obviously nobody knows for sure, let's just get that out of the way now.

Thanks

PDXTabs

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Re: What percentage growth rate to use to project savings?
« Reply #1 on: January 06, 2022, 05:57:27 PM »
I use 7% real (inflation adjusted) growth. But I don't hold my breath.

maizefolk

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Re: What percentage growth rate to use to project savings?
« Reply #2 on: January 06, 2022, 06:05:40 PM »
Using 7% will minimize overall error.

Using 4% increases the odds you will be pleasantly surprised by the future relative to your past projections.

gdborton

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Re: What percentage growth rate to use to project savings?
« Reply #3 on: January 06, 2022, 06:10:34 PM »
I've always used 7%, 3% for inflation 4% to live on in retirement.  It's based on the Trinity study.

Historically the market has done much better than 7% YoY, but I like conservative estimates.

pnw_guy

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Re: What percentage growth rate to use to project savings?
« Reply #4 on: January 06, 2022, 06:14:54 PM »
Are you asking for real or nominal returns?

Using real returns (less inflation) makes things much easier. I usually assume a real return of 3%.

joenorm

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Re: What percentage growth rate to use to project savings?
« Reply #5 on: January 06, 2022, 06:22:50 PM »
Are you asking for real or nominal returns?

Using real returns (less inflation) makes things much easier. I usually assume a real return of 3%.

I'll be honest and say I have never actually considered it. But I will now. Can you expand a little?

maizefolk

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Re: What percentage growth rate to use to project savings?
« Reply #6 on: January 06, 2022, 06:38:34 PM »
I've always used 7%, 3% for inflation 4% to live on in retirement.  It's based on the Trinity study.

Historically the market has done much better than 7% YoY, but I like conservative estimates.

Over the last 150 years the CGAR of the stock stock market (after adjusting for inflation and with dividends reinvested) is actually almost exactly 7%.

Wintergreen78

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Re: What percentage growth rate to use to project savings?
« Reply #7 on: January 06, 2022, 07:02:00 PM »
When I was starting out I used 7%/year nominal returns to project. My actual returns over the last 15 years have been 10%/year, so Im well ahead of my original projections.

Your income/savings rate/rate of return will vary over time, so I wouldnt worry too much about your initial assumptions. Youll update every so often to reflect what has actually happened anyway.

JAYSLOL

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Re: What percentage growth rate to use to project savings?
« Reply #8 on: January 06, 2022, 07:15:16 PM »
I use 7%.  It of course can depend on how your asset allocation for savings is set up.  Im ~90% stocks and stick with 7%, but if I for some reason switched to 60/40 stocks/bonds then Id probably want to use 4% - 5%. 

SeattleCPA

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Re: What percentage growth rate to use to project savings?
« Reply #9 on: January 07, 2022, 08:25:00 AM »
I like to use numbers from sources like Vanguard (e.g., see their recent "Outlook" here) to construct a weighted average...

So pretty darn low. Like 3%-ish return on my portfolio?

Here's what they say on page 5 of their recent "outlook" whitepaper btw about equities...

Quote
We expect the lowest ones in the U.S. (2.3%4.3% per year), with more attractive expected returns for non-U.S. developed markets (5.3%7.3%) and, to a lesser degree, emerging markets (4.2%6.2%)

pnw_guy

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Re: What percentage growth rate to use to project savings?
« Reply #10 on: January 07, 2022, 08:51:03 AM »
I like to use numbers from sources like Vanguard (e.g., see their recent "Outlook" here) to construct a weighted average...

So pretty darn low. Like 3%-ish return on my portfolio?

Here's what they say on page 5 of their recent "outlook" whitepaper btw about equities...

Quote
We expect the lowest ones in the U.S. (2.3%4.3% per year), with more attractive expected returns for non-U.S. developed markets (5.3%7.3%) and, to a lesser degree, emerging markets (4.2%6.2%)

I use 3% real return because not only the Vanguard research you cite, but also because numerous credible sources (John Bogle, William Bernstein) are on record as saying investors should expect lower returns over at least the next 10 years or so. If you want to understand why they make this prediction, read up on a concept called the Gordon Equation.

No one really knows what's going to happen, but my philosophy has always been to expect the worst and hope for the best

SeattleCPA

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Re: What percentage growth rate to use to project savings?
« Reply #11 on: January 07, 2022, 03:10:31 PM »
I like to use numbers from sources like Vanguard (e.g., see their recent "Outlook" here) to construct a weighted average...

So pretty darn low. Like 3%-ish return on my portfolio?

Here's what they say on page 5 of their recent "outlook" whitepaper btw about equities...

Quote
We expect the lowest ones in the U.S. (2.3%4.3% per year), with more attractive expected returns for non-U.S. developed markets (5.3%7.3%) and, to a lesser degree, emerging markets (4.2%6.2%)

I use 3% real return because not only the Vanguard research you cite, but also because numerous credible sources (John Bogle, William Bernstein) are on record as saying investors should expect lower returns over at least the next 10 years or so. If you want to understand why they make this prediction, read up on a concept called the Gordon Equation.

No one really knows what's going to happen, but my philosophy has always been to expect the worst and hope for the best

In the free ebook I link to in my signature, the 13 word retirement plan (which Bill Bernstein kindly reviewed), I use the Gordon Dividend Growth Model for the forecasts... :-)

BTW, that formula says the rate of return on a stock equals the dividend rate plus the growth rate in dividends. So a 1.5% dividend rate and a 2% growth rate in dividends equals a 3.5% return on the stock. Interestingly, this is the same formula you use for real estate though the "labels" differ: The return you get on a real estate investment equals the income capitalization rate plus the growth rate of the income. E.g., a 1.5% income capitalization rate plus a 2% inflation rate equals a 3.5% return. These are "unleveraged" returns. If you use leverage, that amps up the gains and the losses...

vand

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Re: What percentage growth rate to use to project savings?
« Reply #12 on: January 07, 2022, 03:57:31 PM »
We have had such a long period of overperformance that a period of underperformance is well overdue - I think the chances of the either US or by extension global stocks returning at least their long run average, ie 6.5-7% real, over the next decade are probably less than 25%. 

If someone could guarantee me 7% real today until 2032 I'd bite whole arm off.

However plenty of people who use valuation to asses likely future return have been thinking this for a few years and the market has continued to zoom higher, so you just don't know.
« Last Edit: January 07, 2022, 04:00:47 PM by vand »

v8rx7guy

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Re: What percentage growth rate to use to project savings?
« Reply #13 on: January 07, 2022, 04:11:25 PM »
If someone could guarantee me 7% real today until 2032 I'd bite whole arm off.

I guarantee 7%

Grabs popcorn...

joe189man

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mntnmn117

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Re: What percentage growth rate to use to project savings?
« Reply #15 on: January 07, 2022, 05:38:51 PM »
Outside of everyone's crystal balls, the biggest thing to keep is mine is how you handle inflation on a projection like that.

I ended up including inflation in it on my spreadsheet. That way when I said I'm going to save 20,500 in my 401k, its that amount that goes into it in that year's dollars. Likewise projecting an increase in wages or future expenses seemed easier to wrap my head around. But it forces me to take current expense and add inflation before comparing to future account balances.

ChpBstrd

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Re: What percentage growth rate to use to project savings?
« Reply #16 on: January 07, 2022, 08:25:09 PM »
The issue is:

1) Your Savings Rate is a much bigger influence than your ROI in the early years, and
2) ROI is a much bigger influence than your Savings Rate in your later years before FIRE.

So for example the race from $10,000 to $50,000 will be almost entirely based on your savings rate, but the race from $1,000,000 to $1,500,000 will be almost entirely based on your ROI.

If you are 10 years away from FIRE, that means your projected ROI won't really kick in as a strong influence until - let's say - five years from now. So you're not projecting your retirement timeframe based on performance for the next few years with the information you have available today, you're doing the much harder task of projecting returns for 2027-2032 with the information you have available today. Hell, if you could predict the price of any random commodity in six months, you could just become a multi-millionaire that way, but to do so would be just guessing. 

As if that wasn't hard enough, the sequence of returns matters too. A massive market crater in 2022-2025 would benefit you greatly by raising the likely returns in the decade afterwards. If the crash doesn't happen until 2032 though, it'll severely damage you, even if the market ends up in the same place in either scenario.

The point is to focus on that savings rate as much as possible now, because that's what matters a lot more than guesses about future returns. Increase your income, cut your expenses, move to a cheaper/closer to work area, just do what it takes. Whatever you do, don't take your first $20,000 and try to string together a series of winning stock picks or WallStreetBets gambles until you inevitably lose and set yourself back a year or three.

SeattleCPA

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Re: What percentage growth rate to use to project savings?
« Reply #17 on: January 08, 2022, 07:48:11 AM »
The issue is:

1) Your Savings Rate is a much bigger influence than your ROI in the early years, and
2) ROI is a much bigger influence than your Savings Rate in your later years before FIRE.

So for example the race from $10,000 to $50,000 will be almost entirely based on your savings rate, but the race from $1,000,000 to $1,500,000 will be almost entirely based on your ROI.

If you are 10 years away from FIRE, that means your projected ROI won't really kick in as a strong influence until - let's say - five years from now. So you're not projecting your retirement timeframe based on performance for the next few years with the information you have available today, you're doing the much harder task of projecting returns for 2027-2032 with the information you have available today. Hell, if you could predict the price of any random commodity in six months, you could just become a multi-millionaire that way, but to do so would be just guessing. 

As if that wasn't hard enough, the sequence of returns matters too. A massive market crater in 2022-2025 would benefit you greatly by raising the likely returns in the decade afterwards. If the crash doesn't happen until 2032 though, it'll severely damage you, even if the market ends up in the same place in either scenario.

The point is to focus on that savings rate as much as possible now, because that's what matters a lot more than guesses about future returns. Increase your income, cut your expenses, move to a cheaper/closer to work area, just do what it takes. Whatever you do, don't take your first $20,000 and try to string together a series of winning stock picks or WallStreetBets gambles until you inevitably lose and set yourself back a year or three.

I think I agree with above, with one additional comment or clarification or caveat or something...

If my parents retired when CAPE equaled 20 and intermediate treasuries paid 8% interest, the savings they needed to draw $50K a year maybe equaled $1M. (Just an example. But kinda close to reality.)

For me to retire and draw $50K a year--when CAPE equals basically 40 and intermediate treasuries pay less than 2%--means I probably need more than $1M. Like probably I think more like $1.6M.

Accordingly, one wants to look at possibility that the size of the nest egg you need needs to be bigger that you may have thought or think.


ChpBstrd

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Re: What percentage growth rate to use to project savings?
« Reply #18 on: January 08, 2022, 09:33:42 AM »
The issue is:

1) Your Savings Rate is a much bigger influence than your ROI in the early years, and
2) ROI is a much bigger influence than your Savings Rate in your later years before FIRE.

So for example the race from $10,000 to $50,000 will be almost entirely based on your savings rate, but the race from $1,000,000 to $1,500,000 will be almost entirely based on your ROI.

If you are 10 years away from FIRE, that means your projected ROI won't really kick in as a strong influence until - let's say - five years from now. So you're not projecting your retirement timeframe based on performance for the next few years with the information you have available today, you're doing the much harder task of projecting returns for 2027-2032 with the information you have available today. Hell, if you could predict the price of any random commodity in six months, you could just become a multi-millionaire that way, but to do so would be just guessing. 

As if that wasn't hard enough, the sequence of returns matters too. A massive market crater in 2022-2025 would benefit you greatly by raising the likely returns in the decade afterwards. If the crash doesn't happen until 2032 though, it'll severely damage you, even if the market ends up in the same place in either scenario.

The point is to focus on that savings rate as much as possible now, because that's what matters a lot more than guesses about future returns. Increase your income, cut your expenses, move to a cheaper/closer to work area, just do what it takes. Whatever you do, don't take your first $20,000 and try to string together a series of winning stock picks or WallStreetBets gambles until you inevitably lose and set yourself back a year or three.

I think I agree with above, with one additional comment or clarification or caveat or something...

If my parents retired when CAPE equaled 20 and intermediate treasuries paid 8% interest, the savings they needed to draw $50K a year maybe equaled $1M. (Just an example. But kinda close to reality.)

For me to retire and draw $50K a year--when CAPE equals basically 40 and intermediate treasuries pay less than 2%--means I probably need more than $1M. Like probably I think more like $1.6M.

Accordingly, one wants to look at possibility that the size of the nest egg you need needs to be bigger that you may have thought or think.

For the OP, though, we cannot confidently say they won't be retiring into an environment more like your parents retired into. It would be a disaster for those of us further along the path to FIRE, but depending on the timing it might benefit the OP greatly.

SeattleCPA

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Re: What percentage growth rate to use to project savings?
« Reply #19 on: January 08, 2022, 10:34:01 AM »
Agreed.👍

djadziadax

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Re: What percentage growth rate to use to project savings?
« Reply #20 on: January 11, 2022, 02:04:45 PM »
The issue is:

1) Your Savings Rate is a much bigger influence than your ROI in the early years, and
2) ROI is a much bigger influence than your Savings Rate in your later years before FIRE.

So for example the race from $10,000 to $50,000 will be almost entirely based on your savings rate, but the race from $1,000,000 to $1,500,000 will be almost entirely based on your ROI.

If you are 10 years away from FIRE, that means your projected ROI won't really kick in as a strong influence until - let's say - five years from now. So you're not projecting your retirement timeframe based on performance for the next few years with the information you have available today, you're doing the much harder task of projecting returns for 2027-2032 with the information you have available today. Hell, if you could predict the price of any random commodity in six months, you could just become a multi-millionaire that way, but to do so would be just guessing. 

As if that wasn't hard enough, the sequence of returns matters too. A massive market crater in 2022-2025 would benefit you greatly by raising the likely returns in the decade afterwards. If the crash doesn't happen until 2032 though, it'll severely damage you, even if the market ends up in the same place in either scenario.

The point is to focus on that savings rate as much as possible now, because that's what matters a lot more than guesses about future returns. Increase your income, cut your expenses, move to a cheaper/closer to work area, just do what it takes. Whatever you do, don't take your first $20,000 and try to string together a series of winning stock picks or WallStreetBets gambles until you inevitably lose and set yourself back a year or three.

This is such good piece of advice!!! I can testify that is exactly how it worked  in our case.

Telecaster

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Re: What percentage growth rate to use to project savings?
« Reply #21 on: January 11, 2022, 04:24:47 PM »
If someone could guarantee me 7% real today until 2032 I'd bite whole arm off.

I guarantee 7%

Grabs popcorn...

Boss move.