Retirement and Assumptions about Rates of Return

Jul 6, 2015
Author: Scott Hanson


One of the most important aspects of retirement preparation is asset allocation. Simply, how do you invest over the long term to preserve and maximize your hard-earned savings?

I want to emphasize that, while there’s no crystal ball, investor returns over the next decade are probably not going to be what they’ve been over the previous two decades. Without getting too granular, times have changed. For one thing, our government owes a lot of money, which means they have to use everything in their bag of tricks to keep interest rates low. That’s just one of the many reasons why rates of return are more conservative now than at any time in the last 20 years.

On occasion, a client will come to me and talk about an “advisor” or stockbroker or insurance salesperson who has guaranteed them a certain rate of return on an investment. The client is naturally curious and wants to know if we should look into that particular “opportunity.”

I rarely even have to hear what the investment is, because guaranteed high rates of return don’t exist, and any supposed soothsayer who is promising you a high rate of return on an investment is almost certainly not being completely forthcoming. (And when a high return is possible, the risk to your capital is going to be through the roof.)

When someone promises you a certain high rate of return on an investment, immediately run the other way.

20 years ago, some investors had rate of return assumptions that ranged from 12% to even as high as 20%. Those were only assumptions, and like most things those assumptions were usually much too optimistic. But, as times have changed, now in 2015, a good rate of return assumption would likely be around 6%.

That’s the world we are dealing with now.

Here’s the bottom line: When considering potential rates of return, calculate conservatively. That’s because it’s obviously better to get down the road and to have over-prepared and have too much money, than to find you have retired with too little. So here’s a rule of thumb: Whatever rate of return assumptions you make, once you have them, back them off a little bit more. Simply, when planning for the future, be extremely conservative with your assumptions.

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