Quote:
Originally Posted by edslunch
For the financial planners among us, what are your typical assumptions about investment rate of return and inflation for a thirty year retirement? I don’t need the certainty of an annuity, just a lower risk mix of securities. I’m not looking for financial advice, just curious what people’s assumptions are at the high-level planning stage.
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I just wanted to come back to this on the return rate assumptions (I agree with Enoch that a 2-3% inflation rate is probably adequate). This is a pet peeve of mine with planners in general, so apologies in advance.
The thing is it's pretty amateur for a planner to say something like "well the market gets you about 10% a year on average, so let's be conservative and call it 7%. Then after you retire you will want to dial back the risk, so let's say that you get 5% a year after that." To me, this is fraught with a lot of risks and issues. In all honesty, it's great because the numbers look pretty solid in most cases. This is partly due to the retirement funding looking solid at 5% with a minimum RRIF/registered withdrawal at 71 that is 5.28%. If you take that minimum and the projection says that you'll earn close to the same, you're in pretty good shape.
Problem is, the real world doesn't work on averages. So while it's great to say you'll compound at 7% and just take medium risk, what are you actually compounding at? How does that look over the coming decade with bond yields that are likely far lower than what we've seen for the preceding 30-40 years? Those balanced funds that are medium risk and keep you all sorted aren't going to earn you 9-9.5% before fees to net you that 7% if the bond sleeve is getting you 1-2% a year. Unless you're of the mindset that your medium risk equities are going to get you an average return of 9% per year. If you read some of the predictions (they have their own problems, to be fair), you'll see a range of predictions that are at 5-6% and below for the coming years. So, the risk is pretty obvious. You plan for that 7%, thinking its a nice, conservative number and instead end up with something closer to 4-5% after it's all said and done. Then you dial back the risk on retirement and instead of that 5% that kept everything looking good, you end up with something closer to 3%.