What is a reasonably conservative real % yield on investment capital to use for retirement planning purposes?
Posted on Sep 29, 2008 under Retirement Planning |Real % yield is net of inflation. So a 5% total yield with 3% inflation would be a 2% real % yield.
With judicious investments in equities, you should expect long term returns of 8% conservatively. That is based on historical trends. Many good mutual funds have returned better than that. Some as much as 16% for long periods of time. But I doubt that in the future that will be the case unless one looks to overseas and developing markets. Some of those however can hardly be considered conservative. A mixed portfolio of 30-40% debt and 60-70% equities is considered more conservative than one of 100% equities. Interestingly enough, studies have shown that such a portfolio will outperform an all equities portfolio over a long period of time with reduced risk.
That of course is all based on historical data. That data might not be appropriate for future investment returns.
February 20th, 2007 at 8:05 am
With judicious investments in equities, you should expect long term returns of 8% conservatively. That is based on historical trends. Many good mutual funds have returned better than that. Some as much as 16% for long periods of time. But I doubt that in the future that will be the case unless one looks to overseas and developing markets. Some of those however can hardly be considered conservative. A mixed portfolio of 30-40% debt and 60-70% equities is considered more conservative than one of 100% equities. Interestingly enough, studies have shown that such a portfolio will outperform an all equities portfolio over a long period of time with reduced risk.
That of course is all based on historical data. That data might not be appropriate for future investment returns.
References :
February 20th, 2007 at 8:15 am
A 2% "Real" would be a reasonably conservative yield assumption for assets "during" (after you have actually retired) retirement.
It is also the conservative rule of thumb many financial advisors use when determining how much saving you need to retired.
For example if you feel that you need $80K annually to live your current life style. You can estimate that you need 20 x $80K or $1.6M saved up for retirement.
This assume you will get 5% returns ($80K) on the invested money. Therefore, without inflation will last forever. Once you factor in the 3% inflation the $1.6M should still last you 24 years and at 65 you are expected to live 17 years. So you should be fine.
Prior to actual retirement though, you should be invested in higher risk and higher yielding assets. Some use a REAL yield of 5-7% (8-10% anual returns) during PRE-retirement years when doing retirement planning.
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February 20th, 2007 at 8:18 am
From bank deposits you can expect 5.5% gross, subject to tax at 20% and inflation 2.5%
From the stock market you can assume a gross yield of 4%, keeping pace with inflation, but subject to 10% tax. However nothing is certain in the stock market and so most people prefer annuities for retirement income.
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February 20th, 2007 at 8:31 am
The average annual rate of inflation since 1914 has been 3.43%. A lot of research has been done on average annual returns on assets and one of the most famous was a paper written by Ibbotson. His calculations for average annual returns (not inflation adjusted) for approximately the past 75 years was 3.8% annual return for t-bills, 5.5% for long term bonds, 11.2% for large company stocks and 12.4% for small cap stocks. So if you average a portfolio of 80% stocks (50% large cap 50% small cap) and 20% bonds and consider inflation to average the historical average of 3.43% for the duration of your retirment plan, being somewhat conservative I would consider a yield of 6.5% to 7.5% to be reasonable.
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February 20th, 2007 at 12:43 pm
I use 8% on all my calculations That's the 10-11% return adjusted by 2-3% inflation.
I feel that's neither conservative or risky but a moderate number. Such a return can easily be achieved over time by investing in a mix of small/large cap stock funds and offsetting the risk with bonds/cash investements. Where people get into trouble is that they fail to see the underlying assets of the funds are invested in cash which in turn makes their respective portfolio cash heavy and thus offering up a lower return. People also often fail to adequately diversify as they get older. Certainly you need to maintain a healthy return long after you retire, but you can't do so at the same level of risk. A few years in a row of terrible returns combined with the start of annual distributions from the retirement source can devestate an account balance. Also, average returns are over time….but the individual investor has to measure their period in much smaller piecees.
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