Update on my Dec 10th post, instead of a short term CD ladder in my regular IRA, I did this:
US Treasury T-bill - 4.73% yield, matures on 6/2023
US Treasury T-bill - 4.70% yield, matures on 11/2023
US Treasury T-note - 4.64% yield, matures on 4/2024
I don't input anything, it's built in to the program. Here's how to do it:
On the Analysis, Run Analysis tab, go to the blue area below the graph and find the white box that says "Historical Sequence is inactive, click to enable". Click that box so historical sequence is enabled, then go a little to the right and select your choice of starting year.
The program then uses the stock and bond returns & inflation on your allocation and spending year by year, picking 1965 is generally even worse than 1929. The graph shows the total savings and the option to use the historical sequence stays with you when you go look at Tabular Projections.
This is really a powerful feature of the program. For instance, if you build your Roth Conversion plan for your average return case, then you can go back and look to see if it still seems brilliant during various downturns or upturns.
@ricke After thinking about this some more, I am confused. Historical Sequence uses the returns of the S&P 500 for your stock allocation, 10-year T-bonds for your bond allocation, 3-month T-bills for your cash allocation (money market), and historical annual inflation. It uses your asset allocation (% stocks, bonds, money market). You then pick what year you want the sequence to start. So, - Pizza Man's December 10 post gives me about the same as the worst-so-far 1965 starting year. So if a "worst case" is what was intended, that's pretty representative. If that was supposed to be the central value, it seems awfully conservative - how did you come to the conclusion that my asset allocation is a worst case when you, I presume, entered it into the 1965 historical sequence? 😶 When I run my analysis with my asset allocation, general inflation, health care inflation, ROR, etc. as listed on the Dec 10th post, I get, in round numbers just for discussion sake, total savings after 40 years of $1 million. When I then click on the historical sequence starting in 1965, presumably the worst case sequence, total savings jumps to about $3 million. What gives??? The only thing I can see is that I assume that social security drops 20% in 2035. If I assume that SS does not drop my final savings are about $1.2 million.
My observation that 1965 seemed close to your assumed case was true for my situation but apparently not yours. I should not have generalized about results, but the technique of gauging the reasonableness of assumptions by looking at the weaker actual historical outcomes seems useful. Having 1965 give you nearly 3X the final savings vs your assumptions tells me your assumptions are much gloomier than anything that's happened since 1926, when Pralana's data starts.
@ricke Very good points! You've given me a new way to look at my PRC inputs. All I had to do was change my ROR for stocks from 3% to 5% and to not decrease future social security payments and I get close to the 1965 historical sequence result (because I have a 80/20 stock/bond allocation). Pretty neat. Just goes to show how import your inputs values are. On that note, I would like to start a poll (once people are up to speed on PRC Gold 2023) to see what input numbers people are using:
- general inflation
- healthcare inflation
- decrease in Social Security if any
- Real ROR for Money Market, Stocks, Bonds
- and what ever else you think should be added
I will work with @smatthews51 to see the best way to conduct the poll. Any thoughts??
@pizzaman Hope you can get the poll going. I suggested the same last year but it didn't seem to generate much interest. I assume folks who buy PRC Gold are more savvy then the typical investor and a good size sample poll on all input variables would really reveal how most see the market, inflation, etc. Those who are way off can use it as a reason to revisit their strategy and inputs. I'd stick with PRC gold users only if possible.
If you can't get a poll going here I think Google sheets can be used, or, SurveyMonkey (free) might even be better.
It's interesting to be able to break the inflation rate into two different time periods. I wouldn't suggest to my clients to do that. It's a bit much to try to have that much of a crystal ball. PRC is a tool for planning the rest of your life. The more you try to guestimate individual trending over time periods, the more likely you are to be wrong. We know what long-term averages are very likely to be. I'd go with that.
On the flip side, I think it's AWESOME now to have the success rate and expenses broken out into overall spending and essential spending. I LOVE that. It's a look at the minimum dignity floor (if you're a Chris & Jim Retirement & IRA Show podcast listener) and another way to say to clients "This is possible, you can cover your non-discretionary expenses, but may have to be judicious about the non-essential spending (vacations, etc) from year to year.
@ricke If the Analysis, Run Analysis tab, "Historical Sequence" is made active, and you chose a starting date of 1965 (for a worst case scenario), how many sequences are run? Would the number of sequences be a lot less then if you chose 1928?
Additional long term rates of return (capital market assumptions) have been recently summarized by Christine Benz at Morningstar. See:
A useful figure is provided in an attempt to summarize the various (mostly "nominal") returns for a 10 year horizon, although longer horizons are also available in the original sources.
Benz notes: "It’s also important to note that the parameters for these return estimates vary a bit; some of the return expectations are inflation-adjusted, while most are not. In addition, some of the experts forecast returns for the next decade, while others employ slightly shorter time horizons."
Also, Benz emphasizes: "Finally, it’s worth noting that several of the capital markets assumptions included here date from the end of the third quarter of 2022, when bond yields were peaking and stock and bond prices were exceptionally beaten down. Both asset classes have recovered a decent amount since that time, so it stands to reason that many of the forecasts discussed below may have declined accordingly."
In addition to Morningstar's own forecasting, the original source of the CMA values for the other firms covered are as follows:
Blackrock: https://www.blackrock.com/institutions/en-us/insights/charts/capital-market-assumptions
Fidelity: https://institutional.fidelity.com/app/proxy/content?literatureURL=/9904178.PDF
JPMorgan: https://am.jpmorgan.com/us/en/asset-management/institutional/insights/portfolio-insights/ltcma/
Research Affiliates: https://interactive.researchaffiliates.com/asset-allocation
Schwab: https://www.schwab.com/learn/story/schwabs-long-term-capital-market-expectations
@wallace471 It would be great to know which of these firms has the best predictive "batting average" over time. That said, if one were to go with Blackrock (U.S. large-cap equities) at 8.8%, you'd shave off the 3% inflation to get a 10 yr. projected ROR of 5.8%, correct?
Pizzaman - any progress on cobbling together a survey/spreadsheet for members to submit their inputs?
Some of the firms, for example Vanguard, appear to offer their forecasting track-record (buried deeply) in their reports (for example, see Figure II-2 on page 38 in the attached on the Vanguard 60/40 portfolio 10 y forecast).
On the conversion from nominal to real returns for the Blackrock case (forecast of nominal return on large cap equities = 8.8%, and assuming a 3% inflation rate), the calculation is not just a simple subtraction according to the Pralana Gold manual, as I mentioned in the recent post on the "Historical vs. Monte Carlo" topic:
Pralana Gold Manual, page 113: [nominal RoR] = [real RoR]x(1+[inflation])+[inflation]
with a little algebra, we then have:
([nominal RoR]-[inflation])/(1+[inflation])=[real RoR]
So for this example, we would have: (0.088-0.03)/(1+0.03) = 0.056 = 5.6% - a little less than the 8.8%-3.0% = 5.8% obtained from simple subtraction reflecting the denominator impact in the formula.
I suppose that one could compare this formula result to simple subtraction to see the effects over the long term using Pralana Gold to get a sense of the difference. (The Investopedia article I cited just does simple subtraction. A similar explanation also offered here: https://www.investopedia.com/articles/investing/082113/understanding-interest-rates-nominal-real-and-effective.asp)
Of course, the uncertainty in the various returns forecast are large. In the Blackrock example above, they quote the 8.8% annualized "US Equities" (Large Cap) "central (mean) return" over 10 years which ranges from 6.5% to 11.2%. (see: https://www.blackrock.com/institutions/en-us/insights/charts/capital-market-assumptions) So the inflation adjustment formula above may have a relatively small effect given the forecast uncertainties. The "Methodology" tab on that Blackrock website also provides some details on their model assumptions. In Pralana Gold, the Historical and Monte Carlo analysis approach provides a perspective on such return uncertainties.
For any of these firm models, "Caveat Emptor" seems prudent! It is interesting though that many of them appear to have similar forecasts given their different methodologies and experts that contribute to them.
@wallace471 Thanks for your efforts on this topic Robert. I've found it challenging to find a source I wanted to hang my hat on that has been "reasonably accurate" on rates of return. Is Vanguard the only one you've found that shows their track record? Would be great if there was a list of "best in class" sources for data like general and healthcare inflation, rates of return, etc. that users could refer to and rely on.
@nc-cpl I have not started my survey yet as I am waiting for people to get up to speed on PRC Gold 2023 and the inevitable early updating. I will take your suggestion and use Survey Monkey.
@NC: So far, I have not seen a critical evaluation of the models vs reality from the various firms published. Even that Vanguard example was rather limited. I will look out for such comparisons/evaluations, of course.
Attached is the available Fidelity outlook report (April 2022, updated 12/2022), which compares historical to future expectations for a 20 year horizon. Note that their returns ("Exhibit 1") are geometrical and real. Maybe Fidelity will provide a new version this Spring?
(From: https://institutional.fidelity.com/app/item/RD_9902221/capital-market-assumptions.html)
Many firms also seem to favor more dynamic asset allocations rather than static allocations. How we poor DIY'ers (or even advisors) sort out the firm recommendations is the challenge.
Generally, it seems that the various firms predict lower average returns in the coming decade (or more) for US Equities, and stress a shift toward ex-US assets for improved returns. Some forecasts are more pessimistic than others.
I am trying to get a sense of these forecasts and put them in a spreadsheet for easier comparison... As that Morningstar article notes, there is no "standard" way that these firms present their forecast values, other than typically using geometric returns. An attempt at understanding what they do requires a deep dive and considerable time...
Alas, finding reasonable inflation assumptions (starting points) also requires some work...
For future CPI forecasts, this post by Big ERN was interesting and the calculation (using Treasury Par Bond Yields and Treasure Par Real (TIPS) Yields) is rather easy to do:
https://earlyretirementnow.com/2022/01/13/2022-inflation/#more-68878
Using the Treasure.gov postings on 1/27/23, I get a CPI long term (~10 y) projection of ~2.3% using that method -not too far from some of those firm predictions mentioned in my posts. Anyway, I use the historical 3% in Pralana Gold as a base conservative case.
I have used another source for other inflation rates like healthcare, college, etc. based on a chart posted by Mark J. Perry:
https://www.aei.org/carpe-diem/chart-of-the-day-or-century-8/
This chart has been updated by Perry over time -typically twice a year.
By just putting a trend line through the various historical data sets since 2000, one can get a rough idea of the annual inflation trends associated with the specific services and items listed. (The original data originates from the Bureau of Labor Statistics, according to the chart.)
Examples of (crude) inflation rates I estimate from his chart:
Hospital Services: ~9.7%/yr; Medical Care services: ~5.5%/yr (so I have used 3% in Pralana Gold as an estimate on the homepage relative healthcare cost inflation input to give a total of 6%);
College: ~8%/yr (so I have used 5% in Pralana Gold as an estimate on the homepage relative college cost inflation input);
Other categories that may be of interest to extrapolate....Housing: ~3%/yr; Childcare: ~5%/yr
Perry notes that many of these categories are regulated/influenced by the government...
Interestingly, Perry also shows examples of (free market) items and services that have deflated since 2000...like Cellphone services, TVs, software, etc.
Figure II-2 on page 38 of the Vanguard report is very interesting. The "Interquartile range" is something like 3%. That's huge! So, for example, your ROR prediction could be anywhere from 4% to 7% depending on what year you are looking at? Imputing a stock return into PRC of 4% versus 7% gives you a big difference in your retirement account over 10 years, let alone 30 years. The range given by Blackrock is even bigger as pointed out by @wallace471. As I have stated many times before, I give very little weight to ROR predictions. What good is a 10 year prediction if it gets updated every year? The reason why most of the big boys don't provide the history of their predictions is that it would show how inaccurate they truly are, in my humble option 😌.
