Investment returns in retirement?
Just wondering what other people are using for investment return rates, in retirement.
Here’s my take: If you believe in Bengen’s 4% rule (that for a 30 year retirement, you can safely spend 4% of a 50% equities/50% bonds portfolio the first year, then the same dollar amount indexed for inflation over the next 29 years), then running a 30-year scenario with an Excel spreadsheet and experimenting with different rates of return suggests that you get equivalent results by plugging in a real return of approximately 1%, i.e. with that rate of return every year, no ups or downs, you will be broke after 30 years (if you withdraw, say, an inflation-adjusted 40K every year from a million dollar account).
Some folks who do this sort of thing for a living feel that nowadays the 4% rule is too optimistic, because the run-up of the equity risk premium in the latter half of the 20th century is unlikely to continue in the 21st, and because bonds produce such meager returns, and suggest changing the 4% rule to the 3% rule. Playing with the Excel spreadsheet, this corresponds approximately to a linear real return of NEGATIVE 1%.
Anybody care to comment on this? Obviously, the choice of a reasonable rate is dependent on how aggressive a portfolio you want to choose, how lucky you feel, how many years you think you might live, etc., but I’d appreciate any feedback on my thoughts.