Modeling Reduced Short-Term Returns Expectations
I am performing Economics-Based Planning. On the Economic Assumptions for the Nominal Rates of Return for both Regular Assets and Retirement Accounts, I'd like to model the expectation of reduced returns over the next 10 years.
To illustrate, let's say my expectations on nominal returns to stocks are the following:
- over next ten years ~4% nominal
- over a 20+ year horizon ~6% nominal
To model this I have considered three approaches:
1) Be conservative and use 4% for the Nominal Rates of Return on the Economic Assumptions tab
2) Use 4%, but then use the Future Rates of Return to specify 6% starting in 10 years
3) Use a weighted average return assuming 10 years at 4% and 20 years at 6% (4*0.33+6*0.67=5.3)
Approach #1 seems too conservative and yields the lowest Living Standard per Adult. Approach #3, which yields the highest Living Standard may be too optimistic since returns over the first 10 years will likely be lower than 5.3% which would result in carrying too high a savings level into years 11 and beyond. Is Approach #2 the best way to model my assumption?