Retirement Planning: Reducing Return Target and Risk?

[plm]

[quote=scaredyclassic][quote=plm][quote=scaredyclassic]in spite of the fact that every prospectus warns you that past performance does not predict future results, we all kinda believe that past performance predicts future results and the prospectus is just saying that cause the dumb old stodgy SEC makes them.[/quote]

You sort of have to go by past performance. It might not match but that is the best guess. If not, my planning on getting 9 percent returns and being able to retire early is a bad decision.[/quote]

Why is past performance the best guess?[/quote]

Because you can’t know future performance without a time machine?

Took years for me to know something about stocks to not make so many mistakes investing although I don’t know options yet. Don’t know anything about bonds really. But from researching what a Bond fund does, it does seem like a really bad time to buy bonds if you think Interest rates are going to go up. If it goes up then the existing bonds lose value and I would guess that rates are probably going to go up. So staying 100 percent in stocks is probably the best thing to do. Stock market just seems to go higher and higher.

[Coronita]

.

[scaredyclassic]

I’d agree with the first sentence, but just strike the last four words.

All decisions must be made entirely future looking. Past performance is absolutely irrelevant.

[plm]

[quote=scaredyclassic]I’d agree with the first sentence, but just strike the last four words.

All decisions must be made entirely future looking. Past performance is absolutely irrelevant.[/quote]

All the chartists would disagree with your statement as that is what they do, chart the past to predict the future.

[scaredyclassic]

Charts are kinda like reading the entrails of animal sacrifices

[ucodegen]

Many points here:
I wouldn’t rely on 4% yield annually. Long term average for inflation is around 3%. Recently it spiked to 5%. From the aspects of the FIRE group (Financial Independence and Retire Early), they use the 4% not as the desired rate of return. It is the rate of draw-down on assets (between 3% and 4% of total value). There are several things that are having to happen in Retirement. You still have taxes (except in the case of Roth withdraws). Withdraws from standard IRAs and 401Ks are taxed as income. Any stock sales you have on your personal account are taxed up to 20% Fed tax and up to 12.3% California state tax(Cap gain is considered income and California). A Retiree still has inflation making things more expensive as you go through the rest of your life (I estimate it as eating away 3% yearly on my purchasing power – note: Normally wage increases offset inflation cost increases.. but now you are Retired…).

Right now, Gov bonds suck on their return, as well as state Muni’s. One of the un-talked about issues of bonds is that bonds can be more volatile than many other investments including stocks unless held until their end date. If market interest rate go up relative to the interest rate on the bond when purchased, the actual value of the bond has to be discounted relative to the yield vs prevailing interest rate raised to an exponent of the number of years left on the bond. This can severely cut into a bonds value if it has to be sold early with a long period left on the bond. This page has an example of the math: https://www.investopedia.com/terms/b/bond-discount.asp

If you want some ‘reasonable’ interest bearing bond-like investments, you might look towards REITs as well as setting up corporate bond ‘ladders’. A ‘bond ladder’ is breaking up the initial investment into segments and then staggering their duration and maturity. This can also reduce the risk caused by increasing interest rates. A simple example would be to build a bond ladder with a 90 day period and 30 day intervals using $90K. This will mean one of the bond groups will mature on each 30 day interval, providing you with access to cash every 30 days. We can consider it as breaking the $90K into three ‘strings’ (I have seen other terms used) of $30K each. Then invest each ‘string’ in the following sequence of durations:

String 1:90day, 90day, 90day, 90day, 90day…

String 2:30day, 90day, 90day, 90day, 90day…

String 3:60day, 90day, 90day, 90day, 90day…

The ‘stutter step’ at the beginning causes maturation of one of the ‘strings’ every 30 days, at which point funds would be available before the balance is reinvested. To ‘rebalance’ just hold over the imbalance from the other ‘strings’ and add it to the balance on the ‘string’ that has a deficit. It is also possible to do the same with 1 year corporate bonds and using 12 ‘strings’. You can go with something like ‘Vanguard Short-Term Investment-Grade Fund(VFSTX)/VFSUX/VSCSX, or a short term bond ETF. NOTE: While Muni’s are state tax free, their yields are currently below 1%. (https://www.municipalbonds.com/bonds/state_yield_averages/) Current Yields on Corporate Bonds are more than 30% higher than that (NOTE:I use the rough percentage of 30 to be able to ‘eyeball’ a comparison between Muni’s and Corp bonds) https://ycharts.com/indicators/moodys_seasoned_aaa_corporate_bond_yield

I did an Excel spreadsheet a while back to calculate (approximately) what an average monthly income someone would have when retiring at a certain age, with a certain amount of retirement investments yielding a certain return and factoring in inflation(some of this part may need work) to show the projected spending power at retirement relative to current spending power. I don’t know if anyone would be interested. I don’t think the Piggington website can have me attach Excel sheets. I would also have to ‘sanitize’ it because I built it to help someone. It uses a bunch of Amortization and ‘Payment’ calcs. As usual, GIGO would also apply. I didn’t put many garbage input checkers.

Here is a retirement ‘estimator’ that uses previous market results going back to 1871 for some data, and 1927 for other under different scenarios. Warning, there are more data entry point than it looks at first. https://www.firecalc.com/index.php?FIRECalcVersion=3.0&

[gzz]

ucodegen, using long term US stock market returns has serious survivorship bias issues.

How did Russian stocks do from 1871? Farmland in Poland? Confederate and Third Reich bonds?

To put it another way, any asset class we have long term historical data on is cherry-picked and better than average, simply because so many asset classes had drastically negative, -100% returns.

What number to use then?

In my view, it is mistaken and often hubris to assume one’s investments will do better than treasuries. So about 2%.

[scaredyclassic]

Diversify. Like, really diversify.

I think the best returns can be had on stocking up on things on sales at Costco.

I make 20 perc a year on dental floss.

[scaredyclassic]

[quote=gzz]ucodegen, using long term US stock market returns has serious survivorship bias issues.

How did Russian stocks do from 1871? Farmland in Poland? Confederate and Third Reich bonds?

To put it another way, any asset class we have long term historical data on is cherry-picked and better than average, simply because so many asset classes had drastically negative, -100% returns.

What number to use then?

In my view, it is mistaken and often hubris to assume one’s investments will do better than treasuries. So about 2%.[/quote]

Inflation adjusted?

[plm]

If you believe in past performance:

Data from Vanguard:

Years Average 401(k) return
1 year (2020) 15.1%
3 years (2017-2020) 9.7%
5 years (2015-2020) 11.0%

And another:
The average rate of return on 401(k)s from 2015 to 2020 was 9.5%, according to data from retirement and financial service provider, Mid Atlantic Capital Group.

Not inflation adjusted but inflation was very low during that time frame. You could argue that it was quite the bull market but this is for average 401k which would also include bonds so I think an all stock investment return of 9 percent is conservative.

[plm]

If you believe in past performance:

Data from Vanguard:

Years Average 401(k) return
1 year (2020) 15.1%
3 years (2017-2020) 9.7%
5 years (2015-2020) 11.0%

And another:
The average rate of return on 401(k)s from 2015 to 2020 was 9.5%, according to data from retirement and financial service provider, Mid Atlantic Capital Group.

Not inflation adjusted but inflation was very low during that time frame. You could argue that it was quite the bull market but this is for average 401k which would also include bonds so I think an all stock investment return of 9 percent is conservative.

[Coronita]

I am looking at one of my Vanguard accounts I had since 2002. I think it’s the oldest one out of the 26 accounts and it is consistently invested on index funds. Average return has been 7.1%…But there were years that it looked awful, like a deep downturn. Personally, that’s what I’m trying to avoid. Those deep downturns don’t matter if you have another 10-15 years to wait it out. But it would suck if you are drawing from it right after a downturn. I’ve been talking a lot more with people who are seriously considering early retirement. just thinking….

I guess it’s part of the ongoing The Great Resignation….lol…

[sdrealtor]

106 in the retirement mecca known as St George at the moment

[plm]

[quote=Coronita]I am looking at one of my Vanguard accounts I had since 2002. I think it’s the oldest one out of the 26 accounts and it is consistently invested on index funds. Average return has been 7.1%…But there were years that it looked awful, like a deep downturn. Personally, that’s what I’m trying to avoid. Those deep downturns don’t matter if you have another 10-15 years to wait it out. But it would suck if you are drawing from it right after a downturn. I’ve been talking a lot more with people who are seriously considering early retirement. just thinking….

I guess it’s part of the ongoing The Great Resignation….lol…[/quote]

Problem with Covid is that it changes your thinking about life. Why keep working, risk dying or long term covid to make more money. If you have enough, why take risks? That 7.1% return worried me for a little but then I found this calculator https://dqydj.com/sp-500-return-calculator/ and those numbers were much better. Most likely it’s going to be 9% or much higher going forward.

[gzz]

[quote=scaredyclassic]Inflation adjusted?[/quote]

No. But expected inflation is very low too.

[Author]

Posts