Personal Finance (Not Investing) • How to Estimate Return Rates for Retirement Planning

A risk of using an extremely low estimated return is kicking the bucket early for some unknown reason after you worked and planned for 40+ years and thought you were being conservative and then didn't get to enjoy any of it (retirement). I worry about that more than having a great super depression or other terrible return outcome. Even if there is some very bad investment event/period, there's a good chance it might be somewhat balanced out by other periods that are average or above average. YMMV

I mitigate that risk by enjoying life to the best of my ability in all phases and not expecting retirement to be some magic elixir.

I understand. But why can't you retire and in the unlikely event that returns are terrible live on less and enjoy it to the best of your ability?

We didn't retire on thin margins because the prospect of poverty in old age was much more fearsome than waiting too long. Even as early retirees, we may be facing what some people fear from too late: my partner is faced with debilitating chronic pain. They chose to work part time as a distraction and due to far better health insurance options than available on the open market or any job I could get.

So far, we don't regret our timing and on the contrary are thrilled that we have so many options open to us as we face each new challenge.

I don't know your situation....so I am speaking broadly. I am talking more about people using a 1% real rate when the historical average is more like 8% (for equities) and a historical 60/40 real rate is 6%.

My bolded as this is the part I'm responding to.
I gave a cursory explanation why we use 1% and didn't want to highjack the thread with to many details, but to put more meat on those bones...

Our one current pension (hazard duty pension: 100% spousal survivorship with COLA that seems to stay below inflation by about 20% over the 5 years we've had it in place, with a 2% floor and 7% max on the COLA. Ex: July 2022 COLA was 2.1%), currently covers about 60% of our spending plus health insurance. We cover the other 40% of our monthly nut with part time work, which has no COLA. We save very little to nothing for retirement at this point and consider ourselves FI in that we would probably make it through retirement if we chose not to work p.t., but feel it's helpful for reasons other than financial to continue to work p.t. for now.

We won't collect two social security checks for at least another 6 years for me and 9 years for DW if we both take at 62. Once that happens, the two social security checks and one pension will cover about 75% -80% of our spending.

We are 60/20/20 with 5 years expenses in the latter 20% (mostly cash, some I bonds).

Basically, I already know that a big chunk of monies (pension) that will cover our current and future expenses will lag inflation. That's a more full, but not complete, rational behind our situation and using the 1% real as our planning number.

There are other factors that are less objective that contribute to the use of that low real rate of 1% for planning, but those are the objective and imperfect, reasons and rationale. If we had no pension and were relying solely on a pile of accumulated funds in a 60/20/20 portfolio, I would probably use something around 3% real.

So back to the OP's query, what rate do you use in your planning for a 40 year drawdown/retirement?

Statistics: Posted by thedaybeforetoday — Sun Mar 10, 2024 6:42 am — Replies 56 — Views 4655

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