Retirement Calculator Growth

[grizzly_]

What percentage does everybody use when projecting growth on a retirement calculator?

Ramsey has 12% on his online calculator as the historical 30-yr average for the S&P, but I don't believe that's annualized. It also doesn't account for inflation.

I've been using 6.7% to figure for annualized returns and inflationary loss... because I want to know how much money I'll have in numbers I can understand and apply to my quality of life. I don't care that my parents bought their first home for $43,000, a new F-350 is nearly twice that much now. I need my retirement to be in dollars I can use, not dollars that are worth pennies when I need them.

Am I crazy to use 6.7%? If so, too conservative or not conservative enough?

___________

For example, a 35 year old starting today and putting away $500/month at 6.7% would have $670,098 at age 67, according to Ramsey.

The same person using 12% returns would see $2,232,323 on Ramsey's calculator.

Obviously a massive difference in quality of retirement.

So which number is more correct?

 

[David58]

I am very conservative, would rather be pleasantly surprised than shockingly disappointed. So I use 4% for my growth assumption. I don't know what a fiduciary would tell you, but that's what I use.

 

[Bullshot]

You don’t really need to worry about return projections until you are
maxing your qualified accounts and trying to avoid overshooting the mark at the expense of the now. For most people that is not their reality. So whether it is 12% or 6%.... you won’t know until its too late. In the meantime, save early save often. Once you hit your minimum retirement # in savings, then reevaluate your trajectory.

That said, I wouldn’t count on 12 but would hope to do better than 6.

 

[huntandfly]

I use 7% and have the graph show me curves for 4% and 10% as well

 

[Wildabeest]

I’ve always used 7% as a long term rate.

 

[Justin Price]

I use 7%. I expect to do better than that but as stated by others I would rather be surprised at how well I’m doing than disappointed in not having enough.

 

[Deleted member 18333]

I use 8% pre-retirement and 5% post retirement. My only planned change in investment strategy post retirement would be to increase my holdings in dividend bearing accounts. For post retirement dividend yield I use 3%. Dividend income plays a significant role in my retirement income.

 

[duckhunt]

My advisor uses 8 %.

 

[NEWHunter]

I use 7% as a net of inflation rate. My model also has a 20% loss in value built in for this year as we have been seeing above average returns over the past decade. I also show my contributions being substantially reduced from age 45 to 52 to account for a hunting land purchase.

Make sure that whatever rate you use is feasible given your investment allocations. For example, it’s unreasonable to expect 8% after inflation if you’re 50% stocks, 40% bonds, and 10% cash.

Also, I’m shooting to retire at 60. If I can pull off 55 all the better and if I have to go to 65, so be it. As a result I’m running my 100% stock allocation right up to 60 years old. If the market crashes when I’m 59 I guess I’ll work to 65. And the closer I get to 55 the more I can fine tune allocations, projections, variables, etc if need be. YMMV

 

[VikingsGuy]

You have three variables to deal with in this one assumption. Growth, inflation, and change of equities to bond ratios as you near/enter retirement. I made a spreadsheet with each separate so I could run various scenarios, but if I had to use a single number to capture all three I would use 5.5%. But as @mulecreek noted probably better to model pre & post retirement returns on their own. I would probably go 7.5% and 4.5% respectively for that. My worries about mid-term inflation and slower growth coming off of S&P run-up weigh heavily on my thinking.

Plus don't forget the 4th - expected tax rate in retirement.

 

[SAJ-99]

What percentage does everybody use when projecting growth on a retirement calculator?

Ramsey has 12% on his online calculator as the historical 30-yr average for the S&P, but I don't believe that's annualized. It also doesn't account for inflation.

I've been using 6.7% to figure for annualized returns and inflationary loss... because I want to know how much money I'll have in numbers I can understand and apply to my quality of life. I don't care that my parents bought their first home for $43,000, a new F-350 is nearly twice that much now. I need my retirement to be in dollars I can use, not dollars that are worth pennies when I need them.

Am I crazy to use 6.7%? If so, too conservative or not conservative enough?

___________

For example, a 35 year old starting today and putting away $500/month at 6.7% would have $670,098 at age 67, according to Ramsey.

The same person using 12% returns would see $2,232,323 on Ramsey's calculator.

Obviously a massive difference in quality of retirement.

So which number is more correct?

As of yesterday the 30yr return on the S&P 500 was 10.73% (nominal, annualized, geometric compounded rate of return). The equal weighted S&P 500 is 12.04%. Maybe that was where Ramsey came up with the number. Not sure. But I wouldn't use that number. It is way too high for a variety of reasons. 1) you probably don't (and definitely shouldn't) invest 100% of your retirement in the S&P 500 until your 67, 2) US Equities are expensive on a historical basis, 3) the future might not look like the past, 4) the more conservative your return number the more you save each month which leads to better (i.e. higher) numbers at age 67. All you really have control over is how much you save. The returns you have zero control over. The power of compounding is great, but as you pointed out, small changes can have a big impact. 12% was $2.232m, 10.7% is $1.64m.

For your number of 6.7%, as a real return, also probably too high. See previous list of reasons. I get why you want to use real numbers, but your account is not in "real" dollars, it is in nominal dollars now and forever. Any service that gives you a return on your portfolio will give you a nominal return, so a good comparison won't ever be possible. Case in point, in your example you compared your future portfolio with your estimated "real" return of 6.7% to the Ramsey Fantasy Portfolio's nominal return portfolio.

Typical long-term inflation estimate is 2%, so your nominal number is 8.7%. Again, might be reasonable if every cent is in US Equities, but for a diversified portfolio, it seems high. (Please see previous post on how your portfolio allocation should change over time.) Historically (for Boomers), advisors used a 5% real or 7% nominal. The last few years I see a lot of shops bring that estimate down to 4% real, 6% nominal. Boomers had the advantage of a 40yr bull market in bonds (5.65% 30yr return on US Agg). You won't have that advantage.

 

[npaden]

Most of the sophisticated models are going to be running several different rates with probability factors for each of them. I really think that is the best option.

I like to see the models that say there is a 95% chance of meeting your target of $X,XXX per month of income as I think you always need to be thinking that there are a ton of variables that are nearly all beyond our control in the grand scheme of things.

These are all forecasts and while I would like to hope they are better than the extended weather forecasts, there are a lot of variables that can change for sure.

P.S. - I would be leery of any model that used more than 10% estimated return. Most actuaries are using something just under 8% (like 7.75% or 7.9%) as long term investment returns for pension investment assets. That is based on a long term type portfolio that is for sure slanted toward equities but does have some bond exposure.

 

[SAJ-99]

Here are the return assumptions (From NASRA.org) for a number of large pension plans. All Nominal, hopefully geometric, return assumptions.

As for models, here is a monte carlo simulator. https://www.portfoliovisualizer.com/monte-carlo-simulation
You might need to register for the site, but there is a lot of great stuff that is free, including the simulator, which is top notch and similar to anything a FA will run. That said, the results are all BS. There are 20 fields you have to input, including return assumptions, which are complete unknowns. FAs exist because they can convince people that there is some "truth" in the model and make you feel like you have certainty in a world where no such thing exists.

 

[Pucky Freak]

My investments are aggressive and avg. return since inception is very close to what the S&P has been over the same interval. I use 9% growth as an assumption, then factor in inflation separately. The reason I pick a number on the conservative side is I’d rather overshoot than be in a pickle. Asset mix will not transition to bonds over time. One consequence of this strategy is easier calculations. Target age for me to start transitioning out of full time work is 56. If my investment assumptions end up being way off I have a good likelihood of just being able to work extra years to bridge the difference. It would be a very different story if I was planning to work until 65 - I’d use more conservative numbers.

 

[NoKidsAfter40]

What percentage does everybody use when projecting growth on a retirement calculator?

Ramsey has 12% on his online calculator as the historical 30-yr average for the S&P, but I don't believe that's annualized. It also doesn't account for inflation.

I've been using 6.7% to figure for annualized returns and inflationary loss... because I want to know how much money I'll have in numbers I can understand and apply to my quality of life. I don't care that my parents bought their first home for $43,000, a new F-350 is nearly twice that much now. I need my retirement to be in dollars I can use, not dollars that are worth pennies when I need them.

Am I crazy to use 6.7%? If so, too conservative or not conservative enough?

___________

For example, a 35 year old starting today and putting away $500/month at 6.7% would have $670,098 at age 67, according to Ramsey.

The same person using 12% returns would see $2,232,323 on Ramsey's calculator.

Obviously a massive difference in quality of retirement.

So which number is more correct?

Great question: The discounted model of 6.7% which is taking into account for inflation is a bit conservative from my POV. It truly depends on the funds investment approach. I have seen 8-10% on more aggressive funds that have less bond exposure. Also, most models don't take into account the cyclic investing sale cycle that allow for gains to be over 10% with actively managed portfolio's. I think a safe way to look at 6.7% is a worst case ROI and you could expect 8-10% in Real Money with an actively managed portfolio / fund manager.

 

[NoKidsAfter40]

My investments are aggressive and avg. return since inception is very close to what the S&P has been over the same interval. I use 9% growth as an assumption, then factor in inflation separately. The reason I pick a number on the conservative side is I’d rather overshoot than be in a pickle. Asset mix will not transition to bonds over time. One consequence of this strategy is easier calculations. Target age for me to start transitioning out of full time work is 56. If my investment assumptions end up being way off I have a good likelihood of just being able to work extra years to bridge the difference. It would be a very different story if I was planning to work until 65 - I’d use more conservative numbers.

Great point on the time horizon being somewhat short. The longer you have the more exposure to inflationary risk which is critical. Hope 56 is your reality.

 

[VikingsGuy]

Great question: The discounted model of 6.7% which is taking into account for inflation is a bit conservative from my POV. It truly depends on the funds investment approach. I have seen 8-10% on more aggressive funds that have less bond exposure. Also, most models don't take into account the cyclic investing sale cycle that allow for gains to be over 10% with actively managed portfolio's. I think a safe way to look at 6.7% is a worst case ROI and you could expect 8-10% in Real Money with an actively managed portfolio / fund manager.

Lots and lots of published studies show that actively managed portfolios and fund managers in fact fail to beat the market and low load index funds over the long haul. It is one of those amazing observations on the power of marketing combined with the human bias towards assessing one's self as being above average that this industry even exists in 2021.

 

[gwhunter]

Lots and lots of published studies show that actively managed portfolios and fund managers in fact fail to beat the market and low load index funds over the long haul. It is one of those amazing observations on the power of marketing combined with the human bias towards assessing one's self as being above average that this industry even exists in 2021.

THIS!!!!!

 

[RobG]

As of yesterday the 30yr return on the S&P 500 was 10.73% (nominal, annualized, geometric compounded rate of return). The equal weighted S&P 500 is 12.04%. Maybe that was where Ramsey came up with the number. Not sure.

I'm not sure what you mean by equal weighted (not market cap weighted?), but an average (arithmetic mean) of 12% is equivalent to a 10% annualized return (geometric mean) if the standard deviation is 20%. 10% annualized and 20% SD are the numbers I used to use when was a quant (in my dreams) 20 years ago. Perhaps that's it.

I'd run from anyone that was giving me values for average return instead of annualized return to plan. (I'm sure SAJ-99 would too!) It's confusing because funds use average return when they really mean annualized return.

Realistically, for the first 10-20 years market return isn't nearly as important as how much you save.

 

[SAJ-99]

I'm not sure what you mean by equal weighted (not market cap weighted?), but an average (arithmetic mean) of 12% is equivalent to a 10% annualized return (geometric mean) if the standard deviation is 20%. 10% annualized and 20% SD are the numbers I used to use when was a quant (in my dreams) 20 years ago. Perhaps that's it.

I'd run from anyone that was giving me values for average return instead of annualized return to plan. (I'm sure SAJ-99 would too!) It's confusing because funds use average return when they really mean annualized return.

Realistically, for the first 10-20 years market return isn't nearly as important as how much you save.

Correct. All 500 stocks weighted equally rather than market cap.
my initial reaction is Dave Ramsey is an idiot and don’t listen to him. He picked the absolute highest return over the period for the assumption. That is not smart if you are planning for the future. But occasionally he gives good advice, so…. As with anything, you get what you pay for and buyer beware.