Rate of return assumptions for retirement planning

[rsmCanuck]

I have access to the PP past returns and of course I can see long term CAGR of 9+%. More recent returns (i.e. last 25 years) are more in the 7+% range. For retirement planning I was going to be conservative and assume a 7% CAGR on average for the next 30 years. Your thoughts?

[Kshartle]

I have access to the PP past returns and of course I can see long term CAGR of 9+%. More recent returns (i.e. last 25 years) are more in the 7+% range. For retirement planning I was going to be conservative and assume a 7% CAGR on average for the next 30 years. Your thoughts?

50% of the portfolio is currently in essentially a barbell bond fund yielding less than 1.8% and the P/E on US stocks is about 18.

That's a lot of ground for the other 50% (stocks and gold) to make up. It will probably take serious inflation to pull the portfolio up to 7% CAGR over the next 30 years imo.

In that case the 7% might not be as good as you need. Do you need 7% against the backdrop of say....3% inflation?

The former fed chair Bernanke just said in a speech last week he doesn't expect short term rates to ever get back to 4% in his lifetime. I think that's a pretty solid prediction with a decent chance of coming true.


That's all from today forward. If we have a bond crash or a stock crash in the next couple years and you start from either higher rates or a blast of money printing the odds of 7% improve.

I'm not too optomistic on the PP's chances of a serious real return anytime soon though I'm sure others dissagree.

[rsmCanuck]

Yes I was assuming 3% inflation long term; so 4% real returns going forward.

[Kshartle]

Yes I was assuming 3% inflation long term; so 4% real returns going forward.

Well........the total return for the PP was a little over 5% total for 2012-2013. To me that's clearly a negative real return even if the CPI increase is a little below that over those two years.

The current bond portion is clearly in negative real yield territory (even by CPI standards I think), especially if you throw taxes in there.

The US stock market (VTI) has an earnings yield about 25-30% lower than non-US stocks (VEU). It's about 5.5% vs. 7.1% I think.

I think we either need 3-4 more years where the PP either breaks even with inflation or runs a little lower.....or we need a major down year before it gets on track to real returns again. Of course anything can happen in any individual year. 2014 is looking good and may end up great. Where will that leave it for 2015 and 2016? Will you stick with it then? It will look even worse if rates go lower and stocks go higher.

I don't see how the US stock market is going experience major gains on a nominal basis without serious inflation. That will crush the bond portfolio most likely which is double the stocks. Maybe gold will go berserk but it will take an awful lot to squeak out a real return with stocks so expensive already and interest rates near rock-bottom. 

Another scenario is deflation. Maybe the USD gains purchasing power of 2-3% over a year or two. I don't think the central banks or governments will allow this and even if they did that means gold will probably go down and stocks almost certainly will be slaughtered. It might even mean higher long-term rates if globally investors expect the central banks to fight it with inflation or perceive the government's ability to pay as compramised due to a major recession.

Doubtful real return in a deflationary scenario either.

So that leaves the status quo. CPI of 2% or so.......inflation to me and many is clearly higher, more like 5-7% or more, to others the CPI is accurate. Not likely to beat it by 4% any time soon imo.

[buddtholomew]

Yes I was assuming 3% inflation long term; so 4% real returns going forward.

Well........the total return for the PP was a little over 5% total for 2011-2013. To me that's clearly a negative real return even if the CPI increase is a little below that over those two years.

The current bond portion is clearly in negative real yield territory (even by CPI standards I think), especially if you throw taxes in there.

The US stock market (VTI) has an earnings yield about 25-30% lower than non-US stocks (VEU). It's about 5.5% vs. 7.1% I think.

I think we either need 3-4 more years where the PP either breaks even with inflation or runs a little lower.....or we need a major down year before it gets on track to real returns again. Of course anything can happen in any individual year. 2014 is looking good and may end up great. Where will that leave it for 2015 and 2016? Will you stick with it then? It will look even worse if rates go lower and stocks go higher.

I don't see how the US stock market is going experience major gains on a nominal basis without serious inflation. That will crush the bond portfolio most likely which is double the stocks. Maybe gold will go berserk but it will take an awful lot to squeak out a real return with stocks so expensive already and interest rates near rock-bottom. 

Another scenario is deflation. Maybe the USD gains purchasing power of 2-3% over a year or two. I don't think the central banks or governments will allow this and even if they did that means gold will probably go down and stocks almost certainly will be slaughtered. It might even mean higher long-term rates if globally investors expect the central banks to fight it with inflation or perceive the government's ability to pay as compramised due to a major recession.

Doubtful real return in a deflationary scenario either.

So that leaves the status quo. CPI of 2% or so.......inflation to me and many is clearly higher, more like 5-7% or more, to others the CPI is accurate. Not likely to beat it by 4% any time soon imo.

I feel like slitting my wrists after reading this post. 2011-2013 CAGR 4.25%, Total Return 13.29%. 3% inflation over that period, 1.25% real. Not good, but positive. Correct?

[Kshartle]

I feel like slitting my wrists after reading this post. 2011-2013 CAGR 4.25%, Total Return 13.29%. 3% inflation over that period, 1.25% real. Not good, but positive. Correct?

Do you believe 3% inflation? I mean that sincerely; do you believe that budd? 

Obviously there are other threads on whether or not the CPI reflects inflation. A static basket of goods representing the average person/families expenses is going to be a better reflection and I'm sure it's a heckuva a lot higher than 3% over those three years. Hell I just got my cable bill today and it's a 12% increase from last month for the exact same service.

Don't forget taxes. That's the other scam from the government. They inflate, it pushes up the price of your assets and when you sell them they take a cut.