<p>It depends on what rate of return you’re discussing. Usually people talk about the “nominal” rate of return, which historically has included a great deal of “unreal” return since the purchasing power of a dollar has declined steadily over time. </p>
<p>I think 5% is a rather conservative rate to expect, but I think its closer to reality than anything in the high single digits. The “earnings yield” on stocks currently is sitting at just over 5% (PE ratio of just under 20X) and recent growth in sales has been very low single digits,if it’s there at all (at least regarding mature companies).</p>
<p>If we get back into an inflationary environment, then returns will pick up, but a lot of it won’t be “real”. The bond market is telling you that that is not the most likely scenario, and the stock market is slowly coming around to that point of view, IMO. </p>
<p>PS: the 5% number requires a big commitment to equities, since rates are so low.</p>
<p>Good question, I’d like to know that ,too. Stocks are said to appreciate 7% per year on the average, doubling it every 10 years. If you hold 60% in stocks/40% in fixed income, that would be about 4% total annual increase. Quick check on S&P 500 over the last 20 years seems about right.</p>
<p>S&P 500 has returned nominally 9.1% a year (geometric average) over the past 20 years (start of 1994 to end of 2013). CPI inflation over the same period has been about 2.4% a year (geometric average). So using S&P 500 as a benchmark, 9.1% nominal rate of return, and 6.7% real rate of return would be something reasonable from equities. Though you may mix equities with bonds, which will decrease that amount. </p>
<p>While that 9.1% number is not far from the longer term returns on the U.S. stock market, I would point out that for the twenty year period it largely reflects the massive bull market of the late 1990s. Since the beginning of the 21st century, the CAGR of the S & P 500 is about 4%. Moreover, the return on the Japanese stock market since 1996 (long after the bubble burst) has actually been negative.</p>
<p>I’m not making any predictions–just suggesting that I wouldn’t count on a 6.7% real rate of return from the S & P 500 if I was planning for retirement.</p>
<p>Bill Bernstein’s new book (Rational Expectations: Asset Allocation for Investing Adults (Investing for Adults) (Volume 4) puts forward the following expected returns. My personal preference is to be conservative in my predictions, so I use these numbers for my personal planning. It could, of course, be much better or much worse.</p>
<p>Please note that these are REAL returns (i.e., net of inflation).</p>
<p>S&P 500 index was 466.45 on 12/31/93 and closed at 1848.36 12/31/2013 which I make to be about a 7.2% annual compound return. But past performance does not guarantee future results (as they say). If I cherry pick and look at the S&P performance since the end of, say 1999, at 12/31/99 the index sat at 1469.25. Compound annual return over the next 14 years… not an insignificant period of time, to 12/31/2013 is 1.65%.</p>
<p>That looks right NJres, my source seems to be wrong. I remember it had something like 560% over the span of that 20 years but I can’t seem to find it again. Either way, yes, it looks like it was wrong. </p>
<p>@NJres, you have to factor in both inflation and dividends to get some idea of historical real returns. It gets complicated; I mostly just take the word of people whose biases match my own </p>
<p>I was talking to my daughter and I said, “50 percent of the people who are 60 are going to live to 85 and 25 percent of 60 year olds are going to live to 95”. And I realized as I said this, that isn’t correct. It is 25 percent of the 50 percent that live to 85 are going to live to 95. Which means 12.5 percent of 60 year olds are going to live to 95… Not 25 percent of 60 year olds are going to live to 95. This also means only 1.56 percent of couples are going to both make it to 95.</p>
<p>These are big differences from what I thought…plus I think these numbers are a little high…so…might be time to party and spend some money. :)</p>
<p>Definitely don’t need longevity insurance. </p>
<p>I used to live next to such couple, wife was 94(must be 95) now, husband was 98(must be 99). They were featurde in our local newspapers. When the husband felt down, the wife( who barely looked older than 60 ) came knocking on our door. She wanted my husband to come and lift her husband up to his bed, it was his birthday,because he felt off his bed, she couldn’t lift him. What’s remarkable is that they both had some kind of illness to overcome, she had breast cancer and he had heart bypass surgery. But she told me she took lots of vitamins. </p>
<p>Well, considering my great uncle died at 107-110 (paternal), and my grandparents all lived to be about 90, and my folks are turning 85 & 90, I think we definitely have the longevity gene in our family (expect dad has at least a decade or more of pretty good health–both still golf about 3x/week or more). I’m glad H has a pension that will pay for his lifetime and a reduced amount for my lifetime. Definitely, we expect to collect for many years.</p>
<p>My neighbor is 90 or 93 (I can’t keep track). People just seem to live very long lives in Hawaii (or maybe I just know a lot of seniors). I have patients who are in their 70s and 80s who come to our programs. It’s nice to see them and the devotion among the couples. I have one board member who is in his 80s (went to his 60th anniversary party the other year–nearly all the grandkids flew in from around the country).</p>
<p>There’s an elderly couple who live down the street from me. She’s 93, he’s 92. She had breast cancer in her late 70s and a heart operation about 5 years ago. The husband had prostate cancer. They’re both still going strong. And i guess it’s to be expected that if you live that long, you’ll experience some disease along the way that you beat. </p>
<p>She still cleans the house by herself…a 3 story home. They both use the stairs no problem, food shop. They even continue to throw dinner parties that they cook. My H and I attended one & had a blast because they know such interesting people. (We were the youngest ppl there. One woman was a famous Metropolitan Opera singer who serenaded us after dinner!) The wife was a leading jewelry designer in NYC…the duchess of Windsor’s favorite designer (the duchess commissioned her to design pieces that later sold for tons of money at Sotheby’s). The husband worked at leading magazines. It’s so much fun to listen to their stories about working in NyC during the 50s thru the early 90s. If I could age like these two, I’d be thrilled. Ofc, if I could have had her amazing career, that would have been super, too.</p>
<p>Likely the stairs help keep them fit–cardiovascular conditioning right in the comfort of their own home! It is neat to have friends who are very interesting. That is one of the things I love about attending events with my most senior board member–he really knows an amazing collection of people. ;)</p>
<p>Speaking of different averages on annual returns, I encountered an interesting example. If you have $100 invested and had a 100% return one year followed by a 50% loss the next year, the average return is 25% although you only have $100 after 2 years. People in finances should come up with a better definition of average.</p>