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How do I Model Asset Allocation and Account Rates of Return in My Plan?
How do I Model Asset Allocation and Account Rates of Return in My Plan?

This article discusses how to enter rate of return in your plan

Nancy Gates avatar
Written by Nancy Gates
Updated over a week ago

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.

If we had a crystal ball and knew what inflation, stock market returns, and our longevity were going to be, this would all be very easy! Since we can’t, we always want to be prepared for the unexpected such as lower future returns, retiring in a bear market or simply changing our plans. For this reason, we currently allow you to model your risk profile by changing the optimistic and pessimistic Rates of Return. This way, you don’t rely on assumptions that we make and can more accurately model your investment profile as it pertains to you and your holdings.

Your rate of return should represent your asset allocation, which is the percentage of equities and fixed income you have in each account. We recommend you use the historical return or own 10 year return as a reference.

Enter nominal rates, do not adjust for inflation.

The rates you enter in the software will drive the growth of your portfolio in the Planner and affect many aspects of your plan.

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 get more granular, you may want to utilize Portfolio Visualizer's Monte Carlo Simulation.

Pessimistic

You may want to you may want to utilize 10th percentile values from Portfolio Visualizer's Monte Carlo Simulation (considered the worst case scenario), to inform your Pessimistic rate of return.


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.


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