Based on a comment from Ann on our post discussing Quicken's Financial Planning tool, I decided to experiment with long term investment return assumptions.
Our initial assumption would be earnings of 8% (I assume including inflation / non-real returns) before retirement and 4% before retirement.
Ann wisely questioned our assumptions asking if it made sense to keep all of our investments in what would appear to be mostly fixed income asset classes (for a 4% return) - especially if we were going to draw on the proceeds over 30 years. Perhaps, Ann recommended, we could invest a portion of our assets in more aggressive asset classes.
Ann raised an excellent point - frankly I would probably do so. I was very curious to see the effect of a single extra percentage point of return.
Using Quicken 2007's What If function, I decided to model increasing our retirement returns from 4% to 5%. What an amazing difference - just at the push of a button our situation changed entirely from:
(before) - a three year shortage where we would have to sell assets or reverse mortgage our house
(after) - an extra three years plus of money, so we can live longer if we decide to do so!
Ann, thank you! It was a very interesting experiment.
Actually, it's in line with a number of industry articles I've been reading that advocate higher equity asset allocations for retirees due to increased longevity.
Of course, with the end of one's financial plan uncertain - do we really know how long we live - volatility can be especially challenging.
My gut says to keep 4% just to be safe and motivate me to earn more money, but when it comes time to retire to put retain a larger percentage of assets in higher producing asset classes.
What would you do? Are you retired at this time? How are you allocating equity versus fixed income? What do you plan to do?