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Annual Rate of Return for Planning

dkinsella1023

How does the annual rate of return entered in planning assumptions get applied for planning purposes? Is it based on the total amount invested?

The reason for the question is that I own some stocks that pay high dividends but have lost value. The dividends continue to increase in dividend per share. So I'm wondering if I should adjust (increase) my annual rate of return in planning given that the dividend per share is increasing but the total value of my portfolio is decreasing.

Thanks for your feedback!

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Accepted answers

Scooterlam

https://community.quicken.com/discussion/comment/20388157#Comment_20388157

Regarding the setting the rate of return, understand that LTP uses rate of return to calculate your entire plan going out 20, 30 or 40 years. I can't say what you should do exactly, but I would not adjust rate of return given short term market fluctuations. For sure, this and other assumptions are a source of error in your plan, as with any planner. You might find these posts helpful when thinking about your RoR assumption for your portfolio, for the long term:

https://community.quicken.com/discussion/7925144/lifetime-planner-resources-for-setting-rate-of-return-and-inflation-assumptions

https://community.quicken.com/discussion/7935791/lifetime-planner-idea-set-rate-of-return-based-on-investment-portfolio-weighted-asset-classes

Now, some more detail on the portfolio value forecasting in LTP:

While the simple calculation is RoR x Investment value to come to a gains value for any particular year, there a few extra figures to factor in when it comes to applying those gains to the overall portfolio value. First there are two cases where the data source used is slightly different:

In the first year of the plan, LTP uses your current Taxable or Tax-deferred balance in their respective accounts (that are included in the LTP Investments plan assumption) to calculate the next years forecasted investment balance. These are the current investment balances found in Assumptions>Investment>Market Value. Note these market values will change daily based on market fluctuations. That is why your end of plan portfolio balances change daily.

In subsequent years, LTP uses the new forecasted year's Taxable or Tax-deferred balance to calculate the subsequent year's forecasted balance. This is then used to calculate the investment gains and total investment balances, et al, for the rest of the plan

Here is a screen grab of my excel based export of my test file in LTP. This illustration shows step-by-step, using a taxable account type as an example, how investment gains are calculated and from there, how the total portfolio is then forecasted. Note the detailed data in the example comes from an export of the Plan Summary tables in LTP. Follow it through step by step.

Does this get to your question?

All comments

Jim_Harman

The annual rate of return the Lifetime Planner is looking for is the total return of your investments, which would include the dividends. This is what Quicken calls your Average Annual Return.

If you have entered all your investing transactions correctly and have resolved and deleted any Placeholders, can find find you historic annual rate of return by using the Investment Performance Report.

As investment managers always say, past performance is no guarantee of future results.

Tom Young

Coming up with a good (and correct) "annual rate of return" is an exercise in frustration if there ever was one.

The composition of how your wealth grows isn't important in these sort of exercises. If you have one share of stock worth $100 today and a year from now that stock has added $10 to your wealth, then that year's rate of return is something like 10%. But whether it's because the non-dividend paying stock has appreciated by $10, or because the dividend paying stock still is at $100 a share but has paid a $10 dividend makes no difference, it's still in the 10% range (ignoring taxes, of course). You make your best guess.

If you're confident (Ha!) that the dividend will exceed the decline if stock price then the adjustment would be positive, and negative if you think the decline in stock price will be more than the dividend.

dkinsella1023

I'm probably not asking the question correctly. Maybe an example would be better.

Let's say I have investments in Quicken of $1 million and the planned annual rate of return I entered in planning assumptions is 8% based on what I know I'm getting in aggregated dividends.

When calculating my account balances chart for the next 30 years, how does quicken apply the annual rate of return I entered. Does it simply take my investment total, multiply it by 8% and add it to the investment total each year? So, assuming nothing else changes, my investments would be $1,080,000 at the end of year one.

If so, I think I would need to change my annual rate of return as my investment amount changes. if my investment amount goes down due to a decrease in the stock prices, but the dividend stays the same in terms of dividend per share, then I should increase the planned assumption for annual rate of return, correct? ARR should be adjusted up because investment amount has gone down but the dividend $ amount has stayed the same.

Scooterlam

https://community.quicken.com/discussion/comment/20388157#Comment_20388157

https://community.quicken.com/discussion/7925144/lifetime-planner-resources-for-setting-rate-of-return-and-inflation-assumptions

https://community.quicken.com/discussion/7935791/lifetime-planner-idea-set-rate-of-return-based-on-investment-portfolio-weighted-asset-classes

Now, some more detail on the portfolio value forecasting in LTP:

In the first year of the plan, LTP uses your current Taxable or Tax-deferred balance in their respective accounts (that are included in the LTP Investments plan assumption) to calculate the next years forecasted investment balance. These are the current investment balances found in Assumptions>Investment>Market Value. Note these market values will change daily based on market fluctuations. That is why your end of plan portfolio balances change daily.

In subsequent years, LTP uses the new forecasted year's Taxable or Tax-deferred balance to calculate the subsequent year's forecasted balance. This is then used to calculate the investment gains and total investment balances, et al, for the rest of the plan

Does this get to your question?

dkinsella1023

Thanks for information. I really appreciate it!!