How to Estimate Future Returns in Retirement

Our retirement plan's chance of success depends a lot on assumptions we make about future investment returns. In this video, I walk through my approach to this issue.

Empower: https://robberger.com/empower
New Retirement: https://robberger.com/new-retirement
Vanguard Returns 1926-2022: https://investor.vanguard.com/investo...
FICALC: https://robberger.com/tools/ficalc/
Portfolio Visualizer: https://robberger.com/tools/portfolio...
Kitces Article: https://www.kitces.com/blog/monte-car...

Key Takeaways from the video:

--A retirement plan’s chance of success is sensitive to our Investment return assumptions. A small change in return assumptions can significantly affect our plan’s chance of success.

--All return assumptions rely, in whole or in part, on historical returns. At one extreme, we can run simulations based entirely on historical returns, as Bill Bengen did in his 1994 paper that gave us the 4% rule. This is also how some retirement calculators work, such as Ficalc.

--Alternatively, we can use Monte Carlo simulation to model future outcomes, which rely on our average return and volatility, again based on historical results.

--Whatever approach we use should account, at a minimum, for our portfolio’s asset allocation. A 100% stock portfolio should have different return and volatility assumptions than a 60/40 portfolio. The better approaches should also account for current market conditions.

It’s rarely ideal to use just one return assumption. Our assumptions should change with changes to our investment plan and to reflect different economic regimes. For example, the current high valuations suggest that future returns over the next decade will be lower than historical averages. Our retirement plan should reflect this reality.

0:00 - Welcome to the Financial Freedom Show!
0:52 - Historical returns
1:49 - FiCalc
2:39 - Empower
4:56 - Coming up with a number
6:50 - Portfolio Visualizer
9:06 - New Retirement
9:41 - Optimistic/Pessimistic return
14:57 - FiCalc/Increase withdraw amount
18:18 - Sequence of Returns Risk
22:02 - Assumptions
25:21 - Better or worse

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ABOUT ME

While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.

I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (https://amzn.to/3by10EE)

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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.

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