| Default insterest rate for planning? |
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mopowers
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Location: CA
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| Default insterest rate for planning? |
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When calculating retirement savings, what is a good growth rate to assume? 7, 8, 9, etc??
FYI, I will be using aggressive mutual funds and will retire in 27 years.
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Thu Feb 18, 2010 6:47 pm |
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oldguy
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Location: arizona
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The historical return for the aggressive fund has averaged about 11.5%/yr for about 75 years (after the Great Depression). If you look at several 30-yr periods, you will get between 10% and 13.5%. And 30-yrs is about the period that most of us use for wealth building, after age 55 or 60 we must switch into our wealth preservation years.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
The most recent 30-yr period, ending last month was 11.16%/yr. Some people select a purposely low growth rate to be conservative - others select the nominal expected growth rate and then add a +/- tolerance to their final answer. Whatever method you use, watch out for nonlinearity. Eg, $30k @ 12%/yr for 30 yrs = $1,000,000. But at 6% it = $172,000 (way less than half of $1M).
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Thu Feb 18, 2010 10:17 pm |
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isralexba
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Hi,
Taking into account 11% interest rate can be misleading ... This is due to two factors:
1. Even if one can achieve a rate of 11% he (or she) will have to invest all its retirement savings in a very aggressive plan. Aggressive means that his life savings can fall steeply exactly when he needs the money.
2. As for the number itself - Benjamin Graham talks about 6-8% rate investing in stocks, and since you won't invest all your money in stocks then this rate will be lower.
My personal recommendation is to plan using 4% - 6% real interest rate (and not nominal rate as inflation would eat away a lot of the margins). This means that you should choose very cost effective investment products with very low management fees, as those will eat away your profits as well...
Good luck!
Alex.
The Safe Investment Guide
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Tue Mar 16, 2010 7:08 am |
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coaster
Senior Advisor
Cash: $ 1318.80
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Location: Wisconsin
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I agree with the suggestion to use a "real" growth rate. That would automatically take inflation into account. If I remember, I think a real rate of three or four percent is the historical average.
~Tim~
Eye Candy : Why Whimsy
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Tue Mar 16, 2010 6:23 pm |
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