In previous articles, we’ve talked about how it’s tough to plan your retirement due to uncertainty about future investment returns…and inflation. In Part 3, we showed how the amount you can spend depends on what you earn on your investments. Problem is: no one knows what investments will earn in the future.
So Principle 6 for retirement spending is: You need to be prepared for a range of outcomes.
Surprisingly, most financial advisers act as though they know what’s going to happen in the future. They give you a projection of your ability to spend based on an assumed rate of return over the next 25 or 30 years. It’s a bit of a “pretend game” – let’s pretend we know what the return will be.
But while the assumption used might be a reasonable estimate, actual rates of return will be different…and perhaps by a lot.
The reality is that investment returns vary significantly, and unpredictably, not just year by year but decade compared to decade. We can see that by showing the returns in past decades. This chart gives the annualised rates of return for 4 major asset classes in each of the decades since the 1970s and the 1920s so far.
