DeepSummary
In this episode of the Personal Finance podcast, Andrew discusses how to estimate future returns when planning for retirement. He emphasizes the importance of getting this right and using conservative assumptions. Andrew explains the pros and cons of using historical returns as a guide, noting that while it's the only real data available, past performance is not indicative of future results.
Andrew introduces tools like FICalc, Portfolio Visualizer, and Empower's Retirement Planner, which can help analyze portfolio performance based on different asset allocations and withdrawal strategies. He also examines a Vanguard chart showing historical returns for portfolios with varying stock/bond allocations.
Ultimately, Andrew prefers to use a conservative 7% rate of return assumption when planning for retirement, even though historical returns may be higher. He believes this approach reduces the risk of planning failure, forces him to invest more, and allows for the possibility of achieving goals faster if actual returns exceed expectations.
Key Episodes Takeaways
- Use conservative assumptions when estimating future investment returns for retirement planning.
- Consider historical data, but understand its limitations in predicting future performance.
- A lower return assumption can motivate higher savings rates and lead to achieving goals faster.
- Asset allocation significantly impacts portfolio returns and volatility.
- Utilize tools like calculators and simulations to model different scenarios.
- Re-evaluate spending needs in retirement to align with a realistic withdrawal strategy.
- Past returns are the only data available, but the future is unpredictable.
- Balance being optimistic about potential returns with prudent planning.
Top Episodes Quotes
- “So it's really important to make sure that we get these returns right, that we think through this in the proper way, and that we have a system in place in order to put this together for our retirement plan so that we can plan this correctly.“ by Andrew
- “Sure, past performance is not indicative of future results, but at the same time, we don't have any other data crystal ball to kind of understand what is going to happen in the future. So we have to look at the past in order to see what's going to happen.“ by Andrew
- “Lower is going to make sure that you can hit that goal faster. And that's the entire thing here. You really want to hit goals faster than you're actually trying to hit them.“ by Andrew
- “A it forces me to invest more, meaning I'm going to invest more dollars because my rate of return is a little bit lower. So my plan actually tells me I need to invest more dollars and so it's going to force me to get more dollars into that account.“ by Andrew
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Episode Information
The Personal Finance Podcast
Andrew Giancola
7/1/24