Monday, July 7, 2014

New Research on How to Choose Portfolio Return Assumptions

In his July 1 article for Advisor Perspectives, Dr. Wade Pfau concludes that a conservative retiree with accumulated savings invested approximately 50% in the S&P 500 and 50% in Intermediate Term Government Bonds will want to consider real rates of investment return in the 1.9% to 3.3% neighborhood when planning a spending budget.  This research is consistent with the approximate 2% real rate of return (5% investment return and 3% inflation) recommended in this website.  As discussed in our post of October 11 of last year and the February, 2014 article found in the Articles & Spreadsheets section of our website, our recommended investment return and inflation assumptions for the spreadsheets provided in this website are based on interest rates implied by current immediate annuity purchase rates with a small margin for more risky investments.  And while it is important to use reasonable assumptions, the Actuarial Approach does provide for automatic adjustment with smoothing over time for the differences between actual and assumed experience that will inevitably occur.