Investment Rates of Return

What are other ESPlanner users assuming for investment rates of return, annually, over the next 20-30 years?

This factor seems critical, at least in our case. So I'm very interested to hear what you're using. Many financial analysts today are saying that "it's a whole new ball game" (for a variety of reasons), i.e. you can no longer look at historic stock market returns, for example, to predict what we can earn from now on. Even 6% seems a bit optimistic given this new attitude.

Any input would be appreciated. (This includes mutual funds, bonds, individual stocks, regular savings. We're just using a single rate to cover all.)


The truly relevant number is the spread between inflation and rate of return; otherwise known as Real Rate of Return. However, you will see a different result if the spread comes from 6% return minus 3.25% inflation rather than 9% return and 6.25% inflation or some other combination. This is not to imply that 2.75% is a typical spread--it may not be. I usually do a sensitivity analysis that considers various rates of return and inflation rates. That's part of the power of esPlanner. For a more complete discussion on how these rates relate, I recommend Ed Easterling's book Probable Outcomes. Easterling shows that returns are a function of inflation, GDP, and PE ratios (for stocks). Of course bond returns will be affected by interest rates which will also be affected by inflation. I generally use the lowest rate of return that I feel will be achievable given my tolerance and capacity for risk. Some people are quite concerned about high inflation in the next few years. There are many reasons why this might or might not plahy out. It is helpful to keep in mind that really high rates of inflation rarely persist for long periods of time.


Good question. Assuming an inflation rate of 3% I find it useful to run a few cases, say 6%, 8%, and 10%. Smaller and larger numbers can also be instructive.

I also run Monte Carlo, and then find the non-Monte Carlo fixed percentage that results in the same living standard. A useful number to have a handle on.

All of this gives you a range of outcomes -- most importantly living standard, but also differences in asset growth/depletion, borrowing, etc. Your tolerance for such items as debt may influence which resulting scenarios you are most interested in trying to follow.

At least every year re-run ESP with your actuals and updated assumptions. Evaluate where you stand. Possibly make changes in your financial life.

With a 20 to 30 year investment horizon you can afford to be more aggressive, especially if you're young. Realize that even when you are 65, for planning purposes you still have 30 or more years to go before crossing the finish line.

Nothing is a sure thing. I find ESP a useful tool. Use it as a guide. Take the time to understand what it's telling you, but periodically assess and adjust.


My approach is to use the stock/bond mix as my starting base -basically the asset allocation model.

Currently I am using a 70 stock/30 bond assumption, which is projecting a return of between 8%-10% return p.a. with volatility (standard deviation) of 15%-20%. The variation is due to the mix that I assume my stock portion is invested -whether S&P500, Emerging Market or Global stocks. I try to revise these regularly (i.e. quarterly).

I'd change the question a bit to try and understand how various combinations of inflation and RoR impact your situation. Basically a sensitivity analysis. At certain points (e.g. low inflation, high returns) you are probably in good shape, other combinations would be okay, and still others (e.g. high inflation, low returns) will have a big hit on your consumption / standard of living. By doing this, you can estimate where you’ll be okay or better and where you’ll have serious issues.

Unfortunately there's no simple Bell curve for inflation / RoR and poor combinations seem more plausible today although we really don't know if they are or not.

Overall, depending on your vulnerabilities, you can try to adjust to manage those areas that seem most critical.


We use cookies to deliver the best user experience and improve our site.