Author Topic: what % return do you use?  (Read 2949 times)

des999

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what % return do you use?
« on: November 01, 2017, 10:40:13 AM »
I know there are a lot of folks that are in similar situations as me.  I have a good stache saved up, I have a pretty good idea of when I'll hit my magic number where I'll be FIRE, but I wonder if I'm overly optimistic. 

Basically, most sites you read say 7% is a fairly common number to use for returns over the long haul, and I tend to agree.  But, when you are less than 10 years away from your number, the accuracy of that 7% return seems to be much more volatile.

How many that have less than 10 years till FIRE are using something lower than 7% and if so, what?  Especially if you consider the recent bull run we've been on, it seems almost impossible to expect and average of 7% over the next 10 years.

Is anyone worried they won't hit their FIRE date as soon as they'd like?  I think I have been spoiled watching my stache grow month after month, year after year since basically I started saving. 

Maybe I'm just market timing/worrying over nothing, and maybe the timing will be perfect, if after say 10 years of flat returns we go on another bull run when I FIRE.  I guess there's nothing one can really do, but it is frustrating knowing that the timing of things is somewhat out of your control.
Thanks!

rubybeth

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Re: what % return do you use?
« Reply #1 on: November 01, 2017, 12:05:26 PM »
I estimate 5% since I think that accounts for inflation, and if it grows faster than that, fine! If not, I won't be disappointed.

swinginbeef

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Re: what % return do you use?
« Reply #2 on: November 01, 2017, 12:19:34 PM »
I use 5% in my spreadsheets as well.

Lucky Girl

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Re: what % return do you use?
« Reply #3 on: November 01, 2017, 01:30:32 PM »
I'll look at the numbers using several different scenarios.  I've gone as low as 2% returns for the next 2-3 years, and will look at 4% returns for 10 years out just to know how bad returns over several years will impact the portfolio. 

Given the high market valuations, right now seems like retiring in 2000 or 2007.  How would you deal with that type of crash soon after retirement?  I think it is important to think that through and map it out.  And if it doesn't happen--great!

marty998

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Re: what % return do you use?
« Reply #4 on: November 01, 2017, 02:24:42 PM »
I tend to use nil % return to be honest.

Results in (usually) always being delighted with results. I find it difficult psychologically to use say 7%, set a goal with it, and then be upset with not meeting set goal when it doesn't happen and it's out of my control.

des999

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Re: what % return do you use?
« Reply #5 on: November 01, 2017, 02:35:14 PM »
I tend to use nil % return to be honest.

Results in (usually) always being delighted with results. I find it difficult psychologically to use say 7%, set a goal with it, and then be upset with not meeting set goal when it doesn't happen and it's out of my control.

I think this is mostly what I'm worried about myself.  I think I've been spoiled during this bull run, and the thought of the market not making my last years go so easy has me a little stressed.  I don't want to be disappointed if I don't hit FIRE as soon as I think I should. 

boarder42

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Re: what % return do you use?
« Reply #6 on: November 01, 2017, 02:42:37 PM »
6%

EfficientEngineer

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Re: what % return do you use?
« Reply #7 on: November 01, 2017, 04:00:55 PM »
6%

Same here! 

If you look at some graphs, the shorter your accumulation period the less the effect compounding has.  Someone who is looking at 7 years of accumulating will have only a small variability if the markets averaged 4% or 7%.  The longer your accumulation period the more of a factor compounding plays.

SwordGuy

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Re: what % return do you use?
« Reply #8 on: November 01, 2017, 07:17:58 PM »
I use different returns depending on what I'm trying to model.  The nature of the question determines what to use.

For example, I have savings goals for this year.

Now, some random stranger **might** think I have the handsomest beard ever and give me a bazillion dollars for that reason, but I don't include that possibility in my plan.   I view the stock market in any given year pretty much the same way except that it's the results of millions of people's decisions for reasons that are equally inexplicable.  So I ignore stock returns for my savings goals.

For example, one savings goal for this year is to save the max allowed in our two 401Ks.   That's $46,000.    I don't include employer matches in my goal because I don't control what they will do.   I don't include market losses or returns in that goal because that's not in my control.  My job is to enlist 46,000 green workers in my 401K and put them to work for me.


If, however, I'm doing long term trend analysis, including market returns (or losses) is appropriate.  Notice I'm not setting a goal, I'm investigating what the result would tend to be in different situations.   I tend to study 2 of the 3 main ones.   #1, what's the average result?  #2, if things were on the bad side, what would the results tend to be?   For scenario #1, the average result, I use the average return after subtracting inflation.  That's 7% for the US market.    For scenario #2, a below average result, I use a lower number like 3%.  I don't bother with scenario #3, an above average result, because if #1 and #2 aren't in the shitter :) then the other scenario is bound to make me happy.

If I want to stress test my situation I head over to CFireSim.com and put in the numbers.  That will test my plan against historical data.   But again, that's exploration and analysis, not goal setting.



Annie_R

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Re: what % return do you use?
« Reply #9 on: November 01, 2017, 07:24:36 PM »
4% for long term (20+ yr)

maizeman

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Re: what % return do you use?
« Reply #10 on: November 01, 2017, 07:31:44 PM »
For spreadsheets 6.8%.

For setting expectations about when I'm going to hit different financial milestones I actually try to model the uncertainty instead of having a single predicted number. Here's what the looks like:



(The dark gray is the 50% confidence interval for the value of my stash over time, and the light gray is the 90% confidence interval. Each frame in the GIF is the projection for a given month since I started keeping records.)

Right now -- even within the 50% confidence band -- there is close to a 2.5 year gap between the earliest time I'd hit 100% of my minimum FIRE goal and the latest time I'd hit my minimum FIRE goal. To me knowing how big that uncertainty gap is helps a lot in making sure I don't get too discouraged or let my expectations get to high.

...although obviously a perfect prediction of when I'd hit my FIRE number would be far better.

Dr.Jeckyl

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Re: what % return do you use?
« Reply #11 on: November 02, 2017, 10:09:32 AM »
I use 7% for my road to FIRE and I set my goal date at 59.5. However, I've been pushing my contributions higher to see my goal date get closer and closer.

7% - because this is what many experts agree is the average I can expect on my returns.

59.5 - because this is the latest I want to retire. I keep it at this for a what if, but I plan on retiring before this time frame if possible.

I don't include my DW pension or either of our SS. Plus I calculated my required income to include our mortgage even though we may pay it off before or shortly after we retire.

Too many "what if" scenarios. But I try to err on the side of caution.

Acastus

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Re: what % return do you use?
« Reply #12 on: November 02, 2017, 01:03:52 PM »
I have used 8% before accounting for 3% inflation for a long time. The Shiller CAPE is closing in on 1929 and 1999 levels, and bond prices have nowhere to go but down for a while. I think it would be prudent to assume lower returns until a crash/correction, so i started using 6% before inflation.

I think high inflation risk is gone for a long time, since working population is barely growing and the gig economy represents a hard to quantify pool of additional workers. Both will tend to reduce pay increases.

boarder42

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Re: what % return do you use?
« Reply #13 on: November 02, 2017, 01:20:18 PM »
I have used 8% before accounting for 3% inflation for a long time. The Shiller CAPE is closing in on 1929 and 1999 levels, and bond prices have nowhere to go but down for a while. I think it would be prudent to assume lower returns until a crash/correction, so i started using 6% before inflation.

I think high inflation risk is gone for a long time, since working population is barely growing and the gig economy represents a hard to quantify pool of additional workers. Both will tend to reduce pay increases.

plus the fed controls inflation much more now than they did before. Most of the financial collapses have now had measures put inplace that expedite recovery and dont let it get too out of hand.  look at the recovery time from 1988 and 2008 ...  2001 was a huge bubble where the CAPE got really really high so i'd say that one is a bit of an outlier.  but by in large companies make money and put it in the shareholders pockets.

frugaliknowit

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Re: what % return do you use?
« Reply #14 on: November 02, 2017, 02:02:34 PM »
The very long term return of a moderate portfolio (60/40) has been 6%, so that's what I use.

AccidentalMiser

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Re: what % return do you use?
« Reply #15 on: November 02, 2017, 02:05:22 PM »
For spreadsheets 6.8%.

For setting expectations about when I'm going to hit different financial milestones I actually try to model the uncertainty instead of having a single predicted number. Here's what the looks like:



(The dark gray is the 50% confidence interval for the value of my stash over time, and the light gray is the 90% confidence interval. Each frame in the GIF is the projection for a given month since I started keeping records.)

Right now -- even within the 50% confidence band -- there is close to a 2.5 year gap between the earliest time I'd hit 100% of my minimum FIRE goal and the latest time I'd hit my minimum FIRE goal. To me knowing how big that uncertainty gap is helps a lot in making sure I don't get too discouraged or let my expectations get to high.

...although obviously a perfect prediction of when I'd hit my FIRE number would be far better.

Dude, this is awe-inspiring!

boarder42

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Re: what % return do you use?
« Reply #16 on: November 02, 2017, 02:24:45 PM »
For spreadsheets 6.8%.

For setting expectations about when I'm going to hit different financial milestones I actually try to model the uncertainty instead of having a single predicted number. Here's what the looks like:



(The dark gray is the 50% confidence interval for the value of my stash over time, and the light gray is the 90% confidence interval. Each frame in the GIF is the projection for a given month since I started keeping records.)

Right now -- even within the 50% confidence band -- there is close to a 2.5 year gap between the earliest time I'd hit 100% of my minimum FIRE goal and the latest time I'd hit my minimum FIRE goal. To me knowing how big that uncertainty gap is helps a lot in making sure I don't get too discouraged or let my expectations get to high.

...although obviously a perfect prediction of when I'd hit my FIRE number would be far better.

Dude, this is awe-inspiring!

only question i have is why so much cash?

maizeman

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Re: what % return do you use?
« Reply #17 on: November 02, 2017, 02:37:56 PM »
Thanks! And @boarder42, I got irrationally scared about unexpected tax bills for a while.* Irrationality peaked in 2014, and it (and my ridiculous cash cushion (edit: and sadly S-corp income growth)) have both been trending back towards zero ever since. 

*Don't get ownership stakes in LLCs electing S-corp status with people whose net worths and annual incomes are both 10+ times your own, which lets them laugh off the idea of forecasting tax burdens or timing distributions to hit at the same time as K-1s/filing deadlines.
« Last Edit: November 02, 2017, 02:43:54 PM by maizeman »

Retire-Canada

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Re: what % return do you use?
« Reply #18 on: November 04, 2017, 07:18:54 PM »
Maybe I'm just market timing/worrying over nothing, and maybe the timing will be perfect, if after say 10 years of flat returns we go on another bull run when I FIRE.  I guess there's nothing one can really do, but it is frustrating knowing that the timing of things is somewhat out of your control.
Thanks!

I am [in theory] 2-3 years from FIRE I use 7% after inflation for my FIRE projections. So far that's proved to be conservative and I am ahead of projections. That said I don't use my projections for anything but a 30,000' view of my plans. A major crash just before or just after I FIRE will have a huge impact on what actually happens that can't be captured by an average return rate.

You could pick a really conservative number say 4% or 5% before inflation [say 1% to 3% after inflation], but I am not sure what that really does for you. Sure you would be hard pressed to not to be ready to FIRE on that projected date, but your are statistically likely to be ready so early in advance of that conservative date that you f-up your plans by wanting to FIRE at a time when the rest of your plans were not ready [work issues, relationship/family issues, etc..] 

Since the purpose of a projection is to give you an idea of what's likely using something close to the average return for the markets makes sense to me.