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The importance of asset rates of return
The importance of asset rates of return

This article describes how your asset rates of return affect your plan.

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

The importance of setting the asset rates of return in your plan.

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.

“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.” Morgan Housel

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.

Setting asset rates of return in your plan

What you may want to take into consideration

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 what assets you hold in each account in order to meet your goals. Overall, your rate of return will depend upon whether you hold equities, bonds, cash in each account and what percentage of those assets you hold in each account.

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. Typically you will use your historical average as the Optimistic Rate of Return. The higher the optimistic rate of return, the more variability you’ll see in the Monte Carlo and vice versa.

What methods do the Planner use to assess your plan using your rates of return?

Using the Assumptions Tab, you can apply pessimistic, average, and optimistic asset return and inflation rates in addition to your budget and withdrawal strategy to your plan. You may assess your plan with 3 methods including:

Chance of Success reflecting the percentage of Monte Carlo simulations in which you successfully make it to longevity age without running out of money.

Projected Savings based upon linear projections.

Poor Outcome representing the 10th percentile of the Monte Carlo simulations.

*Bear in mind that these projections also rely upon your inflation rates, budget, and withdrawal strategy.

Why does the Planner use both linear projections and Monte Carlo?

Linear projections rely upon one set of assumptions and project one outcome. Although linear projections may be easy to understand, they do not account for the great degree of variability inherent in financial planning.

Monte Carlo provides a range of possible outcomes. It can be reassuring to know that the plan will be successful in a wider variety of potential scenarios than those provided by a linear or historic projection.


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 this publication by the Vanguard Group: Historical Returns, Blackrock's Capital Market Assumptions, and/or the Monte Carlo Simulation at Portfolio Visualizer.

See this article to learn more about using Portfolio Visualizer to determine your rates of return.

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