Lifetime Planner: Resources for Setting Rate of Return and Inflation Assumptions

Scooterlam

Resources for Setting Rate of Return and Inflation Assumptions

Its that time of year that I do a deep dive on my retirement plan with LTP and other planning tools I use. I put together some resources I use for return and inflation assumptions.  While the details are in the links below, I pulled out and summarized forecasts for US aggregate equity, bond, cash and inflation forecasts from various experts on the subject...Perhaps others will find these resources useful.

Lifetime Planner (LTP) asks the user to estimate investment Rate of Return and Inflation assumptions as part of the retirement planning process.   LTP uses a single inflation assumption over the entire plan, whereas the rate of return can be broken down by account type and pre/post retirement time frames.  

No doubt, estimating these two assumptions, are daunting and potential sources of considerable error.   To be sure, your exact assumptions will be wrong   Which is why its worthwhile, IMO, to revisit these regularly and have a sense of both historical performance and expert forecasts, along with a stress test regime using the "what-if" functionality in LTP. 

So, for those of you that are looking for some basis for your assumptions, below are some resources that might help make informed decisions for return and inflation going forward. These capital market assumptions break-down forecasted returns for many different asset classes for future timeframes from 5 to 30 years.

YMMV based upon your actual investment portfolio asset allocation, investment choices and personal outlook.

VANGUARD
(10 year nominal rate of return and inflation forecast)

• U.S. equities                   4.7 % – 6.7 %
• U.S. aggregate bonds     4.1 % – 5.1 %
• U.S. cash                        3.4 % – 4.4 %

• U.S. inflation                  2.0 % – 3.0 %

• Dec 2022 Highlights
• Dec 2022 Detail

BLACKROCK
(10 yr nominal rate of return and 5 yr inflation forecast)

• U.S. equities                   8.8 %
• U.S. aggregate bonds     4.2 %
• U.S. cash                        

• U.S. inflation                  2.9 %

• Nov 2022 Interactive Chart

RESEARCH AFFILIATES
(10 year nominal rate of return and 10 yr and inflation forecast)

• U.S. large cap equities    5.2 %
• U.S. aggregate bonds     4.7 % 
• U.S. cash                        2.3 %

• U.S. inflation                  3.7 %  (@65th percentile)

• Nov 2022 Interactive Chart (may require free registration)

MORNINGSTAR
(10 year nominal rate of return)

• Experts Forecast Stock and Bond Returns: 2023 Edition
  

• Historical Returns
• US equities                     5.7 %
  
• US aggregate bonds       4.3 %
• U.S. Cash

• U.S. Inflation

JP MORGAN
(10 - 15 year nominal rate of return and inflation forecast)

• U.S. large cap equities      7.90 %
• U.S. aggregate bonds       4.6 %
• U.S. cash                          2.4 %

• U.S. inflation                    2.6 %

• 2023 Long-Term Capital Market Assumptions

Chart courtesy of JP Morgan 2023 Long-Term Capital Market Assumptions report, P112

FOMC

• U.S. Inflation        2.0 %
• FOMC Statement on Inflation

Chris_QPW

I really wish that Quicken's Lifetime planner would allow for showing what really happened in comparison to what was predicted.  With the current system it quite easy never to get a "reality check" with what you put in for the predictions.

And I'm sure that would open a lot of people's eyes of how off base their predictions are.  For instance, the likelihood that your inflation rate is the same as the CPI is like 0%.  Not only do they "fiddle" with that number to make it look better, but your mix of expenses are also never going to be the same as what they put in their "baskets".

And then you have all the stupid assumptions in the Lifetime Planner about what accounts you would withdraw money from first and such, which probably line up with almost no one using it.

Scooterlam

Spit-ballin' and sharing another approach to setting the Rate of Return and Inflation assumptions....

Perhaps there is another approach to setting rate of return and inflation assumptions that falls somewhere between using historical asset class data, such as the Morningstar historical returns chart and the other, forward-looking, asset class estimates from VG, BR and RA - see first post.

That approach is to use one's existing retirement investments, back-test them for say 20 years and derive the CAGR (nominal rate of return) and inflation adjusted CAGR (real return).   From there, calculate the corresponding inflation rate for that same time period. See illustration below using my own portfolio investments.

While it may not be an approach for everyone, but perhaps for those that:

• don't trade - buy and hold for long term periods
• are retired or near retired
• have a investment portfolio with historically significant track-record (for back-testing)
• don't anticipate making material investment changes, for the long term
• will rinse and repeat this approach if investment changes are made and held long term

I get that "past performance is no guarantee of future results", a phrase that is often used by investment advisors and their companies. But yet, I suspect many investors look at historical performance for say a mutual fund as indeed a guide to future performance!    And, that many LTP users are likely actively adjusting their portfolio investment choices or otherwise just starting out where "rough numbers" or "rules of thumb" are perfectly acceptable.  

Since I fit into the "don't trade often" categories listed above, I decided to have a look....In the illustration below, you will see my actual portfolio investments, back-tested over 21 years.  Rate of Return, Inflation Adjusted Rate of Return for my investment allocation was found from the tool and the resulting inflation rate calculated...

My result?  6.5% RoR and 2.6% inflation rate, given my portfolio allocation.  YMMV

My existing LTP assumptions? 6 % RoR and 3% inflation rate.

How does this approach compare to the other asset class methods (historical or forward-looking)?   Not sure yet, but suspect it will fall somewhere in the middle of the two.

Perhaps another legit approach and basis for your retirement planner assumptions?

Scooterlam

I added to the OP, the 2023 JP Morgan Long-Term Capital Assumptions to the list of forecasted Rate of Return and Inflation resources for Lifetime Planner or your other favorite tools. The resource provide interesting views on economy, investments and the assumption and models used to build their forecasts. 

Scooterlam

I added to the OP an updated link to the 2023 Morningstar Investment Management's 10 year capital assumptions, which also contains their survey of other major firm's forecasts.