### Author Topic: Net Worth projections  (Read 6202 times)

#### vespito

• Stubble
• Posts: 102
• Location: CA
##### Net Worth projections
« on: June 25, 2014, 04:37:48 PM »
Hi all,
My question - is 4% rate of return an appropriate assumption for the below scenario.  If not, should I use something like 6% (AA=80% equities / 20% bonds*)

I have a spreadsheet that I use to project yearly savings balances/goals.  Currently, I use this formula: (yearly contribution+(existing balance*0.04)) where 0.04 is my projected ROI.  I have a couple columns that show projected balances based on different yearly contributions.  At the end of each year I replace the projected amount with actual balances.  An example:

2013   42   \$100,000 (actual balance at end of year)
2014   43   \$134,000 (projected balance with annual contribution of 30k + 4% return) ; at end of year I will update this to true balance and repeat
2015   44   \$169,360 (projected balance with annual contribution of 30k + 4% return)
2016   45   \$206,134 (projected balance with annual contribution of 30k + 4% return)

Since the bulk of my contributions are tax sheltered, should I be more aggressive with my rate of return number?  I do realize I will be taxed upon withdrawal but while in the wealth accumulation stage is 4% a useable number?

*This is my personal AA - some may think I have too much allocated to bonds.  For the present time, I am happy with my asset allocation as we have my wife's IRA in 100% equities.

Edit: added closing parenthesis to above formula
« Last Edit: June 25, 2014, 04:39:52 PM by vespito »

#### dragoncar

• Walrus Stache
• Posts: 9563
• Registered member
##### Re: Net Worth projections
« Reply #1 on: June 25, 2014, 04:45:46 PM »
I think it's reasonable to use 4% as an inflation-adjusted number.  Obviously it's a bit conservative but you'd rather be pleasantly surprised, no?

#### AssetGrinder

• Stubble
• Posts: 114
• Location: Victoria BC Canada
##### Re: Net Worth projections
« Reply #2 on: June 25, 2014, 07:40:46 PM »
I would stay safe and use 4-6% as an estimation. You have to take in effect capital gains or dividend taxes u may have to pay but most of your investments are sheltered but its still a factor. Also projected stock growth rates for the next 5-10 years are much lower than normal growth. I always tend to use the lowest number when estimating. Also your rate of returns will matter if you are globally diversified and sector diversified. Also it depends if your in funds at all where Mers eat up your returns.

Best of luck!

#### arebelspy

• Senior Mustachian
• Posts: 28430
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• Location: Seattle, WA
##### Re: Net Worth projections
« Reply #3 on: June 25, 2014, 08:36:12 PM »
I think it's reasonable to use 4% as an inflation-adjusted number.  Obviously it's a bit conservative but you'd rather be pleasantly surprised, no?

Agreed.  And over that short of a time frame (3-4 years) it really could be anything, from -20% to +100%, or even outside those.  I'd just go with a medium-low return (like you did) and adjust as it occurs.
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#### Ohio Teacher

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• Posts: 127
##### Re: Net Worth projections
« Reply #4 on: June 25, 2014, 09:08:46 PM »
I made a very similar spreadsheet myself a couple years ago, complete with the year-end replacement with actual account balances.  For mine, I use a 5% inflation-adjusted ROI, but I am 29 and have a 90/10 AA.  It's cool to see someone else did this.  I showed my wife and she just rolled her eyes.

MMM quotes a long-term inflation-adjusted return of 7% for stocks.  I lowered it a bit due to some increasing bond exposure over time and because I'm a bit more conservative on expected future returns.  Whether you use 4% or 5% or 6% or even 7% is moot at this point.  You won't be making a FIRE decision until much later, at which point you will have the actual account value at that point.

In other words, your projected date of FIRE will continue to trend towards the true date of FIRE the closer you get.  Your projection at this point is like throwing darts at a board, but it is a nice thought exercise.  With the returns of the last few years, my date has actually moved up a couple years, but a single bad year will push it back a couple.  The important thing is continued heavy saving and then one day, BOOM!

#### matchewed

• Magnum Stache
• Posts: 4390
• Location: CT
##### Re: Net Worth projections
« Reply #5 on: June 26, 2014, 06:07:33 AM »
Yep I use 4% for my short/medium/long term projections. I may have an optimism gun but that doesn't mean I can't hedge for the future.

#### rmendpara

• Pencil Stache
• Posts: 609
##### Re: Net Worth projections
« Reply #6 on: June 26, 2014, 08:05:45 AM »
Hi all,
My question - is 4% rate of return an appropriate assumption for the below scenario.  If not, should I use something like 6% (AA=80% equities / 20% bonds*)

I have a spreadsheet that I use to project yearly savings balances/goals.  Currently, I use this formula: (yearly contribution+(existing balance*0.04)) where 0.04 is my projected ROI.  I have a couple columns that show projected balances based on different yearly contributions.  At the end of each year I replace the projected amount with actual balances.  An example:

2013   42   \$100,000 (actual balance at end of year)
2014   43   \$134,000 (projected balance with annual contribution of 30k + 4% return) ; at end of year I will update this to true balance and repeat
2015   44   \$169,360 (projected balance with annual contribution of 30k + 4% return)
2016   45   \$206,134 (projected balance with annual contribution of 30k + 4% return)

Since the bulk of my contributions are tax sheltered, should I be more aggressive with my rate of return number?  I do realize I will be taxed upon withdrawal but while in the wealth accumulation stage is 4% a useable number?

*This is my personal AA - some may think I have too much allocated to bonds.  For the present time, I am happy with my asset allocation as we have my wife's IRA in 100% equities.

Edit: added closing parenthesis to above formula

It's anyone's guess what will happen in the short-term (<10 years), but over the long term, returns should be easier to predict. 4% is too low, 5-6% is probably close for real returns over time.

What are you projecting for? If it's for your own personal fun, then it really doesn't matter.

Do both! See how your projections are affected over 20+ years with slight changes in your return rate. (hint: very small increases in return will create significant changes in your final balance... so it really does pay to go risk-on early in your life/career)

#### shotgunwilly

• Pencil Stache
• Posts: 548
##### Re: Net Worth projections
« Reply #7 on: June 26, 2014, 08:20:01 AM »
I'm in it for long term, so I just use history average long term returns on what I'm invested in - average long term inflation rate.  Much higher than 4%.  Doesn't really matter anyways.

#### vespito

• Stubble
• Posts: 102
• Location: CA
##### Re: Net Worth projections
« Reply #8 on: June 26, 2014, 09:43:14 AM »
Thanks everyone - I'll stick with 4%, especially since it's just for myself.

I think it's reasonable to use 4% as an inflation-adjusted number.  Obviously it's a bit conservative but you'd rather be pleasantly surprised, no?

Agreed.  And over that short of a time frame (3-4 years) it really could be anything, from -20% to +100%, or even outside those.  I'd just go with a medium-low return (like you did) and adjust as it occurs.

That was my thought - with potential swings, a lower return projection is the way to go.

It's cool to see someone else did this.  I showed my wife and she just rolled her eyes.

Ha - mine too!  Maybe if I dress up like Disco Stu and have some charts she'll be more interested (thanks dragoncar).

#### DoubleDown

• Handlebar Stache
• Posts: 2076
##### Re: Net Worth projections
« Reply #9 on: June 26, 2014, 01:57:36 PM »
I used 5% for my estimates my whole investing life. 4% is reasonable as others have said, and if you do better than that you will be pleasantly surprised.

Since you enjoy charting/projecting this stuff, I recommend maintaining two different forecasts in your spreadsheet:

1. Estimated Growth (just put in your 4/5/6% estimated rate of return and forecast out from there)
2. Actual Growth (update the current values each year with actual account balances)

It's fun to see how your actual returns compare to your estimates over time! So rather than just overwriting your estimates with actual returns and losing that history, keep the estimates forever. Plus, you can see how any of your individual assets are measuring up over time, and if they're not meeting your goals, you can figure out why or if it's time to change anything.

#### vespito

• Stubble
• Posts: 102
• Location: CA
##### Re: Net Worth projections
« Reply #10 on: June 26, 2014, 02:12:29 PM »
I used 5% for my estimates my whole investing life. 4% is reasonable as others have said, and if you do better than that you will be pleasantly surprised.

Since you enjoy charting/projecting this stuff, I recommend maintaining two different forecasts in your spreadsheet:

1. Estimated Growth (just put in your 4/5/6% estimated rate of return and forecast out from there)
2. Actual Growth (update the current values each year with actual account balances)

It's fun to see how your actual returns compare to your estimates over time! So rather than just overwriting your estimates with actual returns and losing that history, keep the estimates forever. Plus, you can see how any of your individual assets are measuring up over time, and if they're not meeting your goals, you can figure out why or if it's time to change anything.

Thanks for the reply.  I decided to archive my projection worksheets at the end of each year.  This allows me to also track 'how I think about finances' in a general way.  I'm curious to see how my current spreadsheet of today compares to one in 2022 (assuming I am still tracking this).

Edit: Wow - 100 posts on MMM forums.  I don't think I've posted 100 times in all other forums combined.
« Last Edit: June 26, 2014, 02:17:01 PM by vespito »