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4% return above inflation and taxes is a bit optimistic long-term, but otherwise this is correct. However where you stand depends on where you sit. Many other f

by aristus 10y ago

4% return above inflation and taxes is a bit optimistic long-term, but otherwise this is correct. However where you stand depends on where you sit. Many other factor have to be "priced in" and the prices are dependent on what's important to you. Eg, factor in equity (after 15-30 years of mortgage you own a condo), valuation (in 15-30 years that condo will be worth more than 1.5M), risk (...unless that condo sinks into the mud!), finance (you can borrow 1.5M to buy a condo but you can't borrow 1.5M to invest and rent), and flexibility (you can move out of a rental more easily then selling a condo).

xapata 10y ago
Many financial planners assume 4% or even 5% annual returns above inflation. Heck, I forget which state it was, but I remember reading about some boneheaded assumption of 8% annually written into the laws for its pension fund. I agree that 4% is optimistic.
- shostack 10y ago
  Why is that do you think? If you pay them a fee and they aren't pushing investment products you'd think they'd be more realistic...
  - xapata 10y ago
    Historically, 4 or 5% appears to be a reasonable expectation over a 30-year timeframe after 1940 if you consider each year as an independent random variable and expect that the future will look mostly like the past.
- shostack 10y ago
  Can you clarify on why you think 4% is optimistic, but then say 4-5% appears to be a reasonable 30 year expectation? I guess with these things I always think of past performance not being a guarantee of future performance, but on the flip side I'd like to be able to live off my investments when I retire, so making some sort of informed assumptions is probably better than not.
  - xapata 10y ago
    The expected return of a year is not independent of the year before. Rudimentary models that many financial advisors use don't account for that. Even the more sophisticated folks don't account for it enough as I think is appropriate. They think they've observed dozens of years and the evidence says it's nearly impossible for the market to go down (as a whole) over a ten-year period. I think they've observed only a handful of decades and therefore should have very low certainty. I'm still heavily invested in the stock market. I just think you should be very cautious in your assumption of how much money you need to live comfortably on interest/dividends in perpetuity.

by aristus 10y ago

xapata 10y ago

Many financial planners assume 4% or even 5% annual returns above inflation. Heck, I forget which state it was, but I remember reading about some boneheaded assumption of 8% annually written into the laws for its pension fund. I agree that 4% is optimistic.

shostack 10y ago
Why is that do you think? If you pay them a fee and they aren't pushing investment products you'd think they'd be more realistic...
- xapata 10y ago
  Historically, 4 or 5% appears to be a reasonable expectation over a 30-year timeframe after 1940 if you consider each year as an independent random variable and expect that the future will look mostly like the past.
shostack 10y ago
Can you clarify on why you think 4% is optimistic, but then say 4-5% appears to be a reasonable 30 year expectation? I guess with these things I always think of past performance not being a guarantee of future performance, but on the flip side I'd like to be able to live off my investments when I retire, so making some sort of informed assumptions is probably better than not.
- xapata 10y ago
  The expected return of a year is not independent of the year before. Rudimentary models that many financial advisors use don't account for that. Even the more sophisticated folks don't account for it enough as I think is appropriate. They think they've observed dozens of years and the evidence says it's nearly impossible for the market to go down (as a whole) over a ten-year period. I think they've observed only a handful of decades and therefore should have very low certainty. I'm still heavily invested in the stock market. I just think you should be very cautious in your assumption of how much money you need to live comfortably on interest/dividends in perpetuity.