What Retirement Calculators Get Wrong (conversation, spouse, inherit, payment)

[jrkliny]

I think we would all want to see a consistent, 100% safe return of 7%. On the other hand, this past year was stellar and anything near a balanced portfolio had to return several times that amount.

[mathjak107]

Originally Posted by Bideshi

OK, how about me since you kindly asked. I am interested in where you guys are finding safe returns of 7%. Please share!

SAFE NO... but a 50/50 mix of equities and bonds long term, about 12-15 years, returns a pretty constant 6-7%.....
will the future hold true? beats me but 50 years of history says it stands a good chance

[Robyn55]

Originally Posted by Bideshi

OK, how about me since you kindly asked. I am interested in where you guys are finding safe returns of 7%. Please share!

There is no safe 7% return. That is the return estimate used by various large pension plans - and the WSJ this week said they were totally unrealistic. You're lucky to get 4-5%. For you equities people - you still aren't even with where you were a decade ago. Robyn

[TuborgP]

Originally Posted by Robyn55

There is no safe 7% return. That is the return estimate used by various large pension plans - and the WSJ this week said they were totally unrealistic. You're lucky to get 4-5%. For you equities people - you still aren't even with where you were a decade ago. Robyn

Pensions look at average return over a 20 year cycle and thus far they have hit their target. The problem is you are looking at a 10 year cycle going from bottom to on way up.
Experienced investors are looking at their funds and their portfolio's performance and have a clear understanding of how their investments have performed over longer period of time. Assuming one started investing or putting money in their portfolio upon graduation from college and are now 65 they have over 40 years of personal performance data to assess moving forward. That means they have seen previous crisis and are influenced by history and not fear mongers.

Can you link the article so others can see and understand their interpretation of what the article said? Was that 4-5% before or after inflation?

Remember it is not what the average fund does in relationship to the Lipper average it is what your fund/portfolio does. As has been noted by other posters is a wealth of data to help you select funds with a strong historical average. You can also buy an index fund and roll with history for the equity part of your portfolio.

Please note the average annual return of the S&P index as noted in the following chart
http://2.bp.blogspot.com/_C0Jf4qaV4-...-h/S%26P2a.JPG

http://www.istockanalyst.com/article...icleid/2803347 Source for the above chart

Also you are comparing apples and oranges when trying to transfer data about pension fund returns to individual investors who don't have the political constraints on investments. Pension funds can get caught up in socially responsible investing and individuals can go where the money is and human suffering be damned.
Some of the biggest losses came from investments in real estate ventures whose financial success depended on pushing low-income residents out of rent-controlled housing.

http://finance.yahoo.com/news/CalPERS-changes-policy-on-apf-3896298402.html?x=0 (broken link)
The revised policy, adopted at a CalPERS board meeting Monday, says the fund will not participate in investment strategies that rely on eliminating rent-regulated housing or raising rents above regulated levels.

CalPERS is known for its influence on socially responsible investing. Earlier this year, it voted to remove the limit on the number of shareholder proposals it can issue to companies in its portfolio, a change that could boost its influence among publicly traded companies.

Monday's action by the nation's largest pension fund could encourage other large investors to adopt similar policies.

CalPERS has had a practice of trying to invest in projects that will help low-income tenants. But critics say the funds cannot make money off such investments unless tenants enjoying regulated rental rates are pushed out of their homes to make room for people who will pay more.

CalPERS wants to balance a socially responsible investment philosophy with the need to ensure adequate long-term returns for its pensioners.

[mathjak107]

pension fund managers are not the same as you or i.. they are paid to beat the markets. no one needs them if they cant and so they usually need to make heavier bets in the outcomes of different markets, sectors or asset classes .

when their crystal balls are wrong they are usually down more then a diversified investor who is more than happy to accept those market averages and take less risk in one direction or another.

[Robyn55]

I can link WSJ articles - but the links won't work without a subscription.

Just about every major pension plan is under water these days in terms of future assets versus future liabilities. So are most individuals. This is a "retirement" forum. So - presumably - most people have been investing for a long time - more than 10 years. Yet many people in their late 50's - early 60's - now say that they will have to postpone retirement. So your "long run" argument doesn't hold water.

It especially doesn't hold water if one looks at saving/investing for retirement as a continuous process (instead of a dump all the money in at one time kind of thing). If you look at the SP500 - you have a 6.5% return over the last 20 years - 5.71% over the last 15 - -2% over the last 10 - and .5% over the last 5 (without dividends). And - since I have a lot of data (I do a lot of technical analysis) - I ran the numbers on the SP500 from my first date - 1/1/1928 - to today. Annual return of 5.2%. Excluding dividends - which used to be really high because "stocks are risky" but are now pretty low. But also excluding taxes and inflation.

Anyway - I think anyone who uses a 7-8% return at age 65 and spends accordingly has a pretty big risk of ruin before meeting his or her maker.

Note that my specialty is fixed income (I do some equities but trade on technicals) - and I believe a whole lot in socking away as much money as early as possible in tax-deferred retirement accounts (although total or partial ROTH conversions may be an attractive option even for older people this year). Eighth wonder of the world is frictionless compound interest. Robyn

[mathjak107]

s&p index dosnt include dividends which account for 1/3 of all the gains in the s&p.... its up much more then the numbers on the index. not sure why they do that as other indexes do include dividends

i have been investing since 1987 and am up around 1200%.... nothing special diversified funds and no trying to time things on my behalf. just let it ride thru thick and thin with occassional fund changes as managers and objectives may have changed.

[Robyn55]

Originally Posted by mathjak107

s&p index dosnt include dividends which account for 1/3 of all the gains in the s&p.... its up much more then the numbers on the index. not sure why they do that as other indexes do include dividends

i have been investing since 1987 and am up around 1200%.... nothing special diversified funds and no trying to time things on my behalf. just let it ride thru thick and thin with occassional fund changes as managers and objectives may have changed.

With how much money? Don't have to be specific - just number of 000's - high or low end of those 000's. If you started with - say $100k - that would be like $1.2 million today. I used to work as a mod on a financial board in the late 80's - early 90's - on Compuserve (may it RIP) and found that people who talked about percentages rarely talked about dollar amounts. The guy who talked about the 5000% killing usually started with $2k. Many skilled traders made a lot less in % terms - but with a lot more money. Anyway - I think it's a fair question.

Also - in taxable or tax-deferred accounts? Are you currently retired and living off this money - making withdrawals? If making withdrawals - are you assuming 7-8% return until the end of your current life expectancy (and perhaps adding on a few years for good luck)? Do you have other sources of income in the case of portfolio losses - like a company pension? I think people find that what other people are doing in real life very useful. If you have any specific questions about my real life - I'd be glad to answer (although my husband and I aren't really typical).

As for dividends - what you say was true years ago. Hasn't been true for a long time. The current DY on the SP 500 is 1.82%. If that's a third - that gives you 5.46% overall.

FWIW - as a fixed income investor - the 80's were great. Long term treasury zero coupon bonds returned more than equities. I put $4k in an IRA for my husband in long zeros (during the couple of years when one could put money both in qualified pension/profit plans and an IRA) - and that account is close to $60k now. But I doubt I will ever again in my lifetime see a repeat of the 80's (where we had the tremendous tailwind of interest rates going from double digits to low single digits). Now - interest rates have only one way to go - up. Unless we fall back into another deep recession (which won't be good for very many investments anywhere). Robyn

[jrkliny]

When I look at retirement income, I try different scenarios for rate of return on investments and for inflation rates. I typically use 6% as a conservative rate of return and 3.5% as an average for inflation. Depending on life expectancy and some other factors you should be able to pull out at least 4%/year and still keep up with inflation. I have an additional cushion built in to my projections. Realistically, I should need even less money as I get older. I expect to be more active and spend more early in retirement.

[TuborgP]

Originally Posted by Robyn55

I can link WSJ articles - but the links won't work without a subscription.

Just about every major pension plan is under water these days in terms of future assets versus future liabilities. So are most individuals. This is a "retirement" forum. So - presumably - most people have been investing for a long time - more than 10 years. Yet many people in their late 50's - early 60's - now say that they will have to postpone retirement. So your "long run" argument doesn't hold water.

It especially doesn't hold water if one looks at saving/investing for retirement as a continuous process (instead of a dump all the money in at one time kind of thing). If you look at the SP500 - you have a 6.5% return over the last 20 years - 5.71% over the last 15 - -2% over the last 10 - and .5% over the last 5 (without dividends). And - since I have a lot of data (I do a lot of technical analysis) - I ran the numbers on the SP500 from my first date - 1/1/1928 - to today. Annual return of 5.2%. Excluding dividends - which used to be really high because "stocks are risky" but are now pretty low. But also excluding taxes and inflation.

Anyway - I think anyone who uses a 7-8% return at age 65 and spends accordingly has a pretty big risk of ruin before meeting his or her maker.

Note that my specialty is fixed income (I do some equities but trade on technicals) - and I believe a whole lot in socking away as much money as early as possible in tax-deferred retirement accounts (although total or partial ROTH conversions may be an attractive option even for older people this year). Eighth wonder of the world is frictionless compound interest. Robyn

No just about every pension fund is not under water. A few states have serious issues and some states are in good shape. North Carolina is now 99.8% funded and Illinois is in deep trouble. Do the research and not just read the generalizations. State by state charts are available and have been posted in other threads. How can you exclude dividends when they are part of your return unless you want to distort the data? How long a persons money will last from 65 on is not just a function of return but as you know draw down rate. The draw down rate plus inflation influences the return you need. Did you look at the chart to see if it corroborates your number crunching? The problem is that you are trying to make an argument to people who are in their sixties and have already experienced their return and have perhaps 40 years in the market. Just a question how old are you? Remember like everything in life it is individual, individual individual and we are guess what? INDIVIDUALS with personal histories. A number of us retired in our 50's and early 60's and yes our history holds water as it is reality and not theoretical. Perhaps you want to make your point in the wanna be older and retired forum.