Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Real rate of return

Including Financial Independence and Retiring Early (FIRE)
dspp
Lemon Half
Posts: 5884
Joined: November 4th, 2016, 10:53 am
Has thanked: 5825 times
Been thanked: 2127 times

Re: Real rate of return

#376343

Postby dspp » January 12th, 2021, 7:37 pm

anniesdad wrote:Thank you. My real reason for lurking on here is that I wanted to see what rate of return is realistically achievable in the long term and in the future ie after ironing out peaks and troughs. Crystal ball sort of knowledge needed. I don’t want too much effort, skill :D and intervention and stress. I also invest in buy to let :shock: which has more intervention stress etc. So to sum it all up I think a 10 year test gives me some confidence and 5 or 6 % works for me. Thanks all.


4% used to be the rule of thumb, but recently that was nudged up to 5% (see https://www.marketwatch.com/story/the-i ... 1603380557). Going to 6% might be a tad aventurous ?

regards, dspp

tikunetih
Lemon Slice
Posts: 429
Joined: December 14th, 2018, 10:30 am
Has thanked: 296 times
Been thanked: 407 times

Re: Real rate of return

#376388

Postby tikunetih » January 12th, 2021, 9:50 pm

dspp wrote:4% used to be the rule of thumb, but recently that was nudged up to 5% (see https://www.marketwatch.com/story/the-i ... 1603380557). Going to 6% might be a tad aventurous ?


For the data-minded, Big Ern is probably "da man" when it comes to safe withdrawal rate (SWR) analysis. Here's his response to the reports of Bill Bengen ("4% rule" fella) bumping up his SAFEMAX number:

Can we raise our Safe Withdrawal Rate when inflation is low? – SWR Series Part 41
https://earlyretirementnow.com/2020/10/ ... wal-rates/


Perhaps the most important thing regarding sequence risk and SWRs is to have seared into our brains the enormous range of possible outcomes that can occur. Understanding this should place potential/actual retirees in a better position to monitor progress and remain flexible to making changes if deemed prudent or reasonable, ie. recognising the fallibility of any so-called "rule" when it comes into contact with the real world.

Remaining attentive and willing to be flexible earlier rather than later may help ensure that someone doesn't dig too deep of a capital depletion hole for themselves that they'd be unable to climb out of. Old age isn't the best of times to suffer an awful loss of income that cannot be replaced. Conversely, if fortune swings the other way and someone achieves a very positive (outlier) outcome, especially in the earlier phase when sequence risk is greater, perhaps take note of the "bullet dodged" and thus the scope for drawing greater income, if required.

tikunetih
Lemon Slice
Posts: 429
Joined: December 14th, 2018, 10:30 am
Has thanked: 296 times
Been thanked: 407 times

Re: Real rate of return

#381958

Postby tikunetih » January 29th, 2021, 3:17 pm

Here's another excellent detailed analysis from Big Ern regarding One More Year Syndrome; worth absorbing:

The Effect of “One More Year” – SWR Series Part 42
https://earlyretirementnow.com/2021/01/ ... s-part-42/

Today I like to write about the One More Year Syndrome (OMYS) – the fear of retirement and the decision to just work another year. What I find intriguing about OMYS is that procrastination normally works the other way around. You opt for the fun and easy stuff and promise yourself to do the hard work tomorrow. Only to repeat that charade again tomorrow and postpone the unpleasant tasks to the day after tomorrow. And so on.

...

But can we quantify by how much the OMYS improves your retirement security? Is it worth the additional year in the workforce? How can we incorporate OMYS in the Big ERN Google Safe Withdrawal Simulation Sheet? Is it possible that OMYS will boost your retirement health so substantially that it’s not as irrational as it’s sometimes made? Let’s take a look…

Itsallaguess
Lemon Half
Posts: 9129
Joined: November 4th, 2016, 1:16 pm
Has thanked: 4140 times
Been thanked: 10023 times

Re: Real rate of return

#382021

Postby Itsallaguess » January 29th, 2021, 5:22 pm

tikunetih wrote:
Here's another excellent detailed analysis from Big Ern regarding One More Year Syndrome; worth absorbing:

The Effect of “One More Year” – SWR Series Part 42

https://earlyretirementnow.com/2021/01/ ... s-part-42/


I'm still working, but for a long time now I've considered that the 'One More Year' final-episode of my working life would be something that I'd really want to do, and would look forward to, if and when the time comes.

Whilst the above is an interesting read, it feels like an over-complication on my own plans (or it certainly feels like my own plans aren't well enough thought through at this stage - and the jury is still out on that one!), which I think would likely centre on a number of key themes -

1. My final 'One More Year' salary would go completely untouched, and feed directly into my planned 'Emergency Retirement Cash' fund. If I decided that I'd want a certain level of 'Emergency Cash' when I finally throw the towel in, then given that I'm likely to know the rough 12-month level of diverted wages into that 'Emergency Cash' fund during that final year of working, then I can plan with some precision that the 'Emergency Cash' fund is likely to be fully funded at the end of that 'One More Year' final episode...

2. With my 'One More Year' salary being fully diverted into the 'Emergency Cash' fund, I would be able to 100% test my 'You're on your own now, pal' retirement-funding plans. I can 'pretend' that my 'One More Year' of working is actually my first year of retirement from a 'retirement funding' point of view, and I can set up and test all the necessary account processes and 'living on investment funding' actions that would be required were I to actually be retired at that point...

3. Some of the key benefits that I think I'd get from doing something like the above would be -

  • A beneficial and welcome 12-month 'mental adjustment period', allowing myself to enjoy my final year in work in a way that I'd perhaps not had before, and also allowing myself to drift with some real purpose towards a 'you're not going to be doing this for too much longer' head-space.....this is a key driver to this plan...
  • A potentially risk-free run at testing all the financial levels required to get through that dummy-run year, *just* set against my planned investment income - basically 'learning to live with' the expected investment-income following that safety-net year....
  • The ability, with a fair wind, to call the whole thing off if there's either anything intrinsically wrong with my initial scenario-planning, and if I were to find that more funding were to be needed by potentially delaying retirement beyond that 'One More Year' period. Key to this is simply not telling anyone else at work at all that I might actually be in my final-year period...
  • A rapid method of topping up what's likely to be over and above a 'single retirement year's worth' of 'Emergency Cash' pot-building using my 'One More Year' wages...

There's no doubt some more benefits and pitfalls in all of the above, but given that I've probably got a few years yet before I would want to put the above plan into real-world action, I'm happy to allow myself to day-dream the above 'One More Year' scenario further, and perhaps fine-tune it to accommodate further issues and benefits, but as a potential landing-zone on that final run towards retirement, the above ticks an awful lot of boxes for me, both mentally and financially, and it's something that I've considered would be a big advantage to me for a long time now...

Cheers,

Itsallaguess

torata
Lemon Slice
Posts: 521
Joined: November 5th, 2016, 1:25 am
Has thanked: 203 times
Been thanked: 210 times

Re: Real rate of return

#384356

Postby torata » February 7th, 2021, 8:17 am

anniesdad wrote:Hi All, long time lurker here. Not FIRE ‘d yet I normally review my finances over the Xmas break but this year there is as more procrastination than usual as I was a bit scared to. I’ve been investing with Fidelity platform for 10 years now and I was quite interested to see on my home page my annualised return is 5.6%. I’m not drawing any income and just letting the investments grow.

I thought it might help people as a common question is what rate is sustainable. It’s also useful because 1. I am very far from an expert, and 2. The last 10 years is commonly thought of as being disastrous for investing.

I will add that I diversify and don’t take massive risks. I’m pleasantly pleased with 5.6% pa over 10 years bearing in mind where the world is today.


As a second comparator, my annualized return from Jan 2010 to Dec 2020 for my UK accounts (ISAs, SIPP and taxable accounts) is 8.95%. The SIPP on its own, which is basically 20% bonds, 30% ITs, 50% passives, with occasional rebalancing, is 9.3% annualized.
Like anniesdad, I'm not withdrawing anything yet, nor am I adding any external monies as I'm not in the UK.

~~

For the first time ever, I just did a breakdown of my real* rate of return per year for each of my accounts.
2018 was a bad year across the board, although I didn't really notice it at the time, because the dividend income increase was 7% on previous year.
2020 was bad for my HYP but the SIPP, where the dividends are enough to make small purchases each month and is diversified in several ways, managed 7.3% real return.

torata

*'real' here does not mean with RPI taken off, but 'real for the year', as opposed to annualized, which over one year time spans tends to magnify the returns and the losses.

UnclePhilip
2 Lemon pips
Posts: 211
Joined: November 4th, 2016, 7:30 pm
Has thanked: 22 times
Been thanked: 33 times

Re: Real rate of return

#384697

Postby UnclePhilip » February 8th, 2021, 12:03 pm

tjh290633 wrote:
Joe45 wrote:I don’t view the FTSE 100 as representative of “the market” merely a very small part of it. Have a look at MSCI World index between 2010 and 2020. Even this year has been good for global equities. The Covid crash constituted the shortest bear in history.


Good for a very small subset of them, which have swamped the general market. I think that you need to exclude the FAANGS effect.

TJH

This doesn't make sense to me at all. Just because those large companies are, well, large, doesn't mean they're to be excluded in looking at markets' performance. You wouldn't exclude BP or HSBC from Footsie 100 performance figures.

Global markets have performed amazingly better than UK over the last few years. Just looking at 2020 with the Spring crash, Global Index trackers are up a lot, and our Fisher active global fund is even higher due to tech overweight, while the FT100 has been poor.

No doubt there'll be changing leadership some time, but globally the Spring crash was a technical Bear but actually an enormous correction, so we're now in late Bull market territory.

It was luck and unusual personal circumstances that made me migrate from UK HYP to global funds three years ago. Thank God I did!!

tjh290633
Lemon Half
Posts: 8209
Joined: November 4th, 2016, 11:20 am
Has thanked: 913 times
Been thanked: 4097 times

Re: Real rate of return

#384701

Postby tjh290633 » February 8th, 2021, 12:09 pm

UnclePhilip wrote:
tjh290633 wrote:
Joe45 wrote:I don’t view the FTSE 100 as representative of “the market” merely a very small part of it. Have a look at MSCI World index between 2010 and 2020. Even this year has been good for global equities. The Covid crash constituted the shortest bear in history.


Good for a very small subset of them, which have swamped the general market. I think that you need to exclude the FAANGS effect.

TJH

This doesn't make sense to me at all. Just because those large companies are, well, large, doesn't mean they're to be excluded in looking at markets' performance. You wouldn't exclude BP or HSBC from Footsie 100 performance figures.

It's a classic case of the average being very skewed by a small number of samples. The median would be a better judge of the market performance.

TJH

UnclePhilip
2 Lemon pips
Posts: 211
Joined: November 4th, 2016, 7:30 pm
Has thanked: 22 times
Been thanked: 33 times

Re: Real rate of return

#384717

Postby UnclePhilip » February 8th, 2021, 12:48 pm

tjh290633 wrote:
UnclePhilip wrote:
tjh290633 wrote:
Good for a very small subset of them, which have swamped the general market. I think that you need to exclude the FAANGS effect.

TJH

This doesn't make sense to me at all. Just because those large companies are, well, large, doesn't mean they're to be excluded in looking at markets' performance. You wouldn't exclude BP or HSBC from Footsie 100 performance figures.

It's a classic case of the average being very skewed by a small number of samples. The median would be a better judge of the market performance.

TJH


Actually, I think the best judge of the market performance is the actual market, and not a section arrived at by excluding "a small number of samples". In this case, those invested in the actual market, ie through an index fund, have done extremely well, while those invested in a section determined by excluding the large tech companies who have done extraordinarily well, have done much less well.

And, with reference to risk and reward, I'd say the current behemoths carry very acceptable risk. But of course this returns to old debates, which will reappear as leadership in markets change.

However, the V shaped graph of 2020, if you compare Global index against UK index over this period, is a stark reminder of the huge financial benefit of "go global". Time's will change, but for now I'm gladder than words can express how happy I am to be global. Each to their own....

scrumpyjack
Lemon Quarter
Posts: 4814
Joined: November 4th, 2016, 10:15 am
Has thanked: 606 times
Been thanked: 2675 times

Re: Real rate of return

#384721

Postby scrumpyjack » February 8th, 2021, 1:08 pm

I do agree that the FTSE100 is not a representative index to use for comparison and a whole world index is a much more reasonable comparison.

But while we are talking about 'real' rate of return, it should be IMO the return after inflation. Moreover inflation should be measured by an index of everything that people spend money on, not CPI or RPI. It should for example include the cost of buying a house, the cost of employing someone, the cost of school fees etc etc. I don't think such an index exists as it would be far too inconvenient for governments!

dealtn
Lemon Half
Posts: 6072
Joined: November 21st, 2016, 4:26 pm
Has thanked: 441 times
Been thanked: 2324 times

Re: Real rate of return

#384755

Postby dealtn » February 8th, 2021, 2:00 pm

scrumpyjack wrote:I do agree that the FTSE100 is not a representative index to use for comparison and a whole world index is a much more reasonable comparison.

But while we are talking about 'real' rate of return, it should be IMO the return after inflation. Moreover inflation should be measured by an index of everything that people spend money on, not CPI or RPI. It should for example include the cost of buying a house, the cost of employing someone, the cost of school fees etc etc. I don't think such an index exists as it would be far too inconvenient for governments!


There are components for housing costs and education in the ONS inflation baskets.

CPIH probably the best from the perspective of housing costs.

stevensfo
Lemon Quarter
Posts: 3437
Joined: November 5th, 2016, 8:43 am
Has thanked: 3807 times
Been thanked: 1398 times

Re: Real rate of return

#384985

Postby stevensfo » February 9th, 2021, 10:10 am

dealtn wrote:
scrumpyjack wrote:I do agree that the FTSE100 is not a representative index to use for comparison and a whole world index is a much more reasonable comparison.

But while we are talking about 'real' rate of return, it should be IMO the return after inflation. Moreover inflation should be measured by an index of everything that people spend money on, not CPI or RPI. It should for example include the cost of buying a house, the cost of employing someone, the cost of school fees etc etc. I don't think such an index exists as it would be far too inconvenient for governments!


There are components for housing costs and education in the ONS inflation baskets.

CPIH probably the best from the perspective of housing costs.


To be honest, after decades of discussions with people about how inflation is measured, both in the UK and abroad, I tend to stick with the RPI as the minimum inflation rate to be beaten. I was surprised to read a long time ago, how they use something called 'Hedonic regression' in CPI calculations, which seems to introduce a level of complexity (fiddle factor) that isn't required. Then again, it's true that an overall rate of inflation may affect people in different ways. I guess that a retired person with mortgage paid for, modest house, small car etc is going to be less affected than someone commuting by train every day, kids at school etc.

Steve

PS For some of use, the malt whisky and beer rate of inflation is far more important! ;)

jonesa1
Lemon Slice
Posts: 263
Joined: May 27th, 2019, 9:47 am
Has thanked: 103 times
Been thanked: 142 times

Re: Real rate of return

#385000

Postby jonesa1 » February 9th, 2021, 10:45 am

From 2030 it's planned to align RPI with CPIH. The change has been delayed because it will negatively impact some groups, including DB pensioners - those in RPI linked schemes will get smaller rises and CPI linked schemes could see a hit to their funding position if they have hedged their CPI linked liabilities with RPI linked assets.


Return to “Retirement Investing (inc FIRE)”

Who is online

Users browsing this forum: No registered users and 7 guests