Financial planning by definition entails a wide variety of unknowns, and it's important to account for this inevitability when building a reliable plan. One significant unknown is the uncertainty of future returns.
What you may want to take into consideration
The NewRetirement software does not model any specific assets such as individual stocks, bonds, mutual funds, etfs, bonds or cash.
Asset allocation is accounted forby entering an optimistic and pessimistic rate of return assumptions for each account. While we can't tell you what rates to enter in your own plan, we can provide this general guidance.
When entering your rates of return, we encourage you to consider a number of variables. It's important to know your asset allocation, which is the percentage of equities, bonds, and cash you hold in each account in order to meet your goals.
The rates you enter in the software will drive the growth of your portfolio in the Planner and affect many aspects of your plan. If you are looking for a point of reference, you might explore the historical returns for your asset allocation, or your personal historical return. The higher the optimistic rate of return, the more variability you’ll see in the Monte Carlo and vice versa.
Setting Rates of Return
Align your rates of return with the asset allocation in each account.
Optimistic
You may want to explore the Historical Averages to inform your Optimistic rate of return.
If you would like to know the historical Rates of Return for various asset allocations, sorted by the ratio between equity and fixed income, you may want to refer to our Historical Returns article.
Pessimistic
You may want to explore projected (Monte Carlo) 10th percentile values (considered the worst case scenario), to inform your Pessimistic rate of return.
Asset Allocation 10th Percentile
100 % Equity 5.85%
100% Cash 3.70%
100% Bond 3.78%
90/10% Equity/Bond 5.77%
80/20% Equity/Bond 5.75%
70/30% Equity/Bond 5.71%
60/40% Equity/Bond 5.60%
50/50% Equity/Bond 5.55%
40/60% Equity/Bond 5.40%
30/70% Equity/Bond 5.15%
20/80% Equity/Bond 4.78%
10/90% Equity/Bond 4.32%
Source: Portfolio Visualizer
Additional Considerations
Overly optimistic assumptions may lead to negative outcomes such as an unexpected shortfall or lack of funding for long-term care. Overly pessimistic assumptions may create a variety of other issues such as restricting your spending and lifestyle in retirement, experiencing a higher than anticipated tax liability, and facing Medicare premium surcharges.