My expected entries this year (geometric) are
Inflation- 2.5% (I use the 20y Cleveland Fed model expected inflation: currently 2.4%, I round up.)
Medical inflation /medicare: 3% additional.
IRMAA Limits minus -.5% (because they're fixed and don't get adjusted up with inflation each year).
Cash real return- 1% . SD=2.5%.
Bonds real return- 2% (20 year TIPS yield, currently 2.35 rounded down). SD=7.5%
Stocks real return- 3.5%. Very low, I know. SD=18%.
As with everyone, stocks is the hard one. Research Affiliates site is great, because they have both valuation based model (CAPE) and dividend growth model of valuation--coming at things from totally different angles. Since I have no idea which model is better (and both are more wrong than right), I simply average the two, so my total stock including international expected on their two models comes out to about 3.5. I also look at TPAW's regression of the SP500 and CAPE, it currently assumes 5.1% average return (which translates to 3.5% for Pralana's input after volatility drag is worked in).
@jkandell, Thank you for the great explanation. After further reading, I think I understand the difference between the two (1.6%) is volatility drag?
When using 3.5% as stock real ror (along with 1.42% for cash, 1.93% for bonds, and 2.25% for general inflation), my portfolio underperforms the worst three historical start years (1955, 1956, and 1965) under Historical Sequence Analysis. In your opinion, does this seem too conservative/pessimistic for baseline assumption?
Who knows. I'm using the 3.5% but these same models (and others by companies like Vanguard and Fidelity) have been wrong for decades, all predicting these types of lower returns. Only time will tell. One reason I use the actuarial withdrawal method is the amortization math is "self correcting" and you don't need to get the exact return correct.
4) If you have no idea what inflation will be over the next 10 years, then BUY TIPS because they will protect you from the uncertain inflation risk.
I've always assumed the market places a small cost on the TIP, beyond inflation, with a slightly lower expected yield, since it's inflation insurance. I think the Cleveland model even works that into their inflation prediction. I personally think it's worth it even if it turned out to pay a small amount less than the treasury.
These are my inputs to Pralana Gold:
General inflation 3.5%. 100 year average is about 3.3% so I round up to 3.5%.
Medical inflation 2%
Cash real 0%
Bonds real 0.75% (based on my bond ladder avg nominal yield of 4.24%)
Stocks 5% (100 year avg is nominal 10%) but I down it to 5% real.
Clean and simple, no need for elaborate calculations 😉.
I use those numbers as my base case. To stress test my plan I first assume Social Security goes up 20% in 2033 and run the simulations.
To add more stress I also add an increase in Federal tax rates by 24.9% (the most Pralana Gold will allow) starting in 2035 and run the simulations.
Keep it simple!!
My expected returns entries this year are
Inflation- 2.5% (I use the 20y Cleveland Fed model expected inflation: currently 2.4%, I round up.)
Cash real return- 1% . SD=2.5%.
Bonds real return- 2% (20 year TIPS yield, rounded down). SD=7.5%
Stocks real return- 3.5%. Very low, I know. SD=18%.
As with everyone, stocks is the hard one. Research Associates site is great, because they have both valuation based model (CAPE) and dividend growth model of valuation--coming at things from totally different angles. Since I have no idea which model is better (and both are more wrong than right), I simply average the two, so my total stock including international expected on their two models comes out to about 3.5. I also look at TPAW's regression of the SP500 and CAPE, it currently assumes 5.1% average return (which translates to 3.5% for Pralana's input after volatility drag is worked in).
@jkandell, Thank you for your thoughts. I assume you were referring to Research Affiliates (rather than Research Associates)? Looks like you need an account to reference the data to which you have referred?
Thanks again!
These are my inputs to Pralana Gold:
General inflation 3.5%. 100 year average is about 3.3% so I round up to 3.5%.
Medical inflation 2%
Cash real 0%
Bonds real 0.75% (based on my bond ladder avg nominal yield of 4.24%)
Stocks 5% (100 year avg is nominal 10%) but I down it to 5% real.
Clean and simple, no need for elaborate calculations 😉.
I use those numbers as my base case. To stress test my plan I first assume Social Security goes up 20% in 2033 and run the simulations.
To add more stress and then add an increase in Federal tax rates by 24.9% (the most Pralana Gold will allow) starting in 2035 and run the simulations.
Keep it simple!!
Thank you Pizza Man! Sounds like a good plan! 👍
4) If you have no idea what inflation will be over the next 10 years, then BUY TIPS because they will protect you from the uncertain inflation risk.
I've always assumed the market places a small cost on the TIP, beyond inflation, with a slightly lower expected yield, since it's inflation insurance. I think the Cleveland model even works that into their inflation prediction. I personally think it's worth it even if it turned out to pay a small amount less than the treasury.
Agreed.
For what it's worth, Damodaran January equity risk premium (Normalized Earnings & Payout) is now available. https://pages.stern.nyu.edu/~adamodar/
Using his ERP and 10 year TIPS breakeven inflation rate on December 31, 2025, expected stock real return would be 3.62 + 2.25 = 5.87. This is very generous compared to some of our estimates.
Thoughts on why most of us are using a lower estimate than the "godfather of equity risk premiums"? Does arithmetic vs geometric returns enter into this in some way again?
Cheers!
Edit- Wrong input for risk free rate used initially. Should be ERP (3.62) + 10 year TIPS (1.93) = ~5.55.
My assumptions below, as of Jan 6 2026.
Inputs & Sources
| Input | Type | Value | Refreshed | Comments | |
| ERP | |||||
| Damodaran | 4.20% | 1st, Monthly | https://pages.stern.nyu.edu/~adamodar/ | ||
| Method: Trailing 12 month, with adjusted payout | |||||
| Risk-Free Rate (Treasury Yield) | |||||
| 10-yr Yield | 4.19% | Daily | https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve | ||
| TIPS | |||||
| 10-yr Yield | 1.91% | Daily | https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve | ||
| Expected Inflation | |||||
| 10-yr Inflation | 2.34% | Monthly, btwn 10th-15th | https://www.clevelandfed.org/indicators-and-data/inflation-expectations | ||
Capital Market Assumptions
Cash: 1% Real return
Bonds (TIPS_LADDER): 1.91% Real return
| Inflation | Value | ||
| Arithmetic Avg | 2.36% | ||
| Std Dev | 1.74% | ||
| Geo Avg | 2.34% | ||
| US Equities (S&P 500) | |||
| Arithmetic | Nominal | 9.79% | |
| Std Dev | Nominal | 16.75% | |
| Geometric | Nominal | 8.39% | |
| Arithmetic | Real | 7.25% | |
| Std Dev | Real | 16.34% | |
| Geometric | Real | 5.91% | |
Additional Sources:
* Standard Deviations based on 2000-2025 averages [MoneyChimp - http://www.moneychimp.com/features/market_cagr.htm ]
For what it's worth, Damodaran January equity risk premium (Normalized Earnings & Payout) is now available. https://pages.stern.nyu.edu/~adamodar/
Using his ERP and 10 year TIPS breakeven inflation rate on December 31, 2025, expected stock real return would be 3.62 + 2.25 = 5.87. This is very generous compared to some of our estimates.
Thoughts on why most of us are using a lower estimate than the "godfather of equity risk premiums"? Does arithmetic vs geometric returns enter into this in some way again?
There are three common ways of estimating future returns: Using Schiller CAPE (Market valuation method), focusing on the Equity Risk Premium, or via Dividend Yield & Growth. (Damodaran combines the second and third.)
The low values tend at the moment to be based on CAPE based predictions, regressing the history of starting CAPE and subsequent 10 year returns. CAPE near record highs means near record low future returns. The Yield and Growth and ERP models are giving much higher results.
Having said that, i think you are correct that arithmetic and geometric (and nominal and real) get mixed up a lot in returns estimates.
For what it's worth, Damodaran January equity risk premium (Normalized Earnings & Payout) is now available. https://pages.stern.nyu.edu/~adamodar/
Using his ERP and 10 year TIPS breakeven inflation rate on December 31, 2025, expected stock real return would be 3.62 + 2.25 = 5.87. This is very generous compared to some of our estimates.
Thoughts on why most of us are using a lower estimate than the "godfather of equity risk premiums"? Does arithmetic vs geometric returns enter into this in some way again?
There are three common ways of estimating future returns: Using Schiller CAPE (Market valuation method), focusing on the Equity Risk Premium, or via Dividend Yield & Growth. (Damodaran combines the second and third.)
The low values tend at the moment to be based on CAPE based predictions, regressing the history of starting CAPE and subsequent 10 year returns. CAPE near record highs means near record low future returns. The Yield and Growth and ERP models are giving much higher results.
Having said that, i think arithmetic and geometric (and nominal and real) get mixed up a lot in returns estimates.
Thank you for that useful explanation, @jkandell.
My assumptions below, as of Jan 6 2026.
Inputs & Sources
Input Type Value Refreshed Comments ERP Damodaran 4.20% 1st, Monthly https://pages.stern.nyu.edu/~adamodar/ Method: Trailing 12 month, with adjusted payout Risk-Free Rate (Treasury Yield) 10-yr Yield 4.19% Daily https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve TIPS 10-yr Yield 1.91% Daily https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve Expected Inflation 10-yr Inflation 2.34% Monthly, btwn 10th-15th https://www.clevelandfed.org/indicators-and-data/inflation-expectations
Capital Market AssumptionsCash: 1% Real return
Bonds (TIPS_LADDER): 1.91% Real return
Inflation Value Arithmetic Avg 2.36% Std Dev 1.74% Geo Avg 2.34% US Equities (S&P 500) Arithmetic Nominal 9.79% Std Dev Nominal 16.75% Geometric Nominal 8.39% Arithmetic Real 7.25% Std Dev Real 16.34% Geometric Real 5.91%
Additional Sources:
* Standard Deviations based on 2000-2025 averages [MoneyChimp - http://www.moneychimp.com/features/market_cagr.htm ]
Thanks @boston-spam-02101gmail-com! Very useful!
For what it's worth, Damodaran January equity risk premium (Normalized Earnings & Payout) is now available. https://pages.stern.nyu.edu/~adamodar/
Using his ERP and 10 year TIPS breakeven inflation rate on December 31, 2025, expected stock real return would be 3.62 + 2.25 = 5.87. This is very generous compared to some of our estimates.
Thoughts on why most of us are using a lower estimate than the "godfather of equity risk premiums"? Does arithmetic vs geometric returns enter into this in some way again?
There are three common ways of estimating future returns: Using Schiller CAPE (Market valuation method), focusing on the Equity Risk Premium, or via Dividend Yield & Growth. (Damodaran combines the second and third.)
The low values tend at the moment to be based on CAPE based predictions, regressing the history of starting CAPE and subsequent 10 year returns. CAPE near record highs means near record low future returns. The Yield and Growth and ERP models are giving much higher results.
Having said that, i think arithmetic and geometric (and nominal and real) get mixed up a lot in returns estimates.
@jkandell, Thank you for this insightful response.
Your response inspired me to go into the rabbit hole a bit to explore how best to reconcile the differences we see between the CAPE-reversion outlooks and the iERP (Damodaran) outlooks.
My brief summary of conclusions, excluding the rationale:
- iERP (Damodaran) is considered better for mid-term forecasts (next ~5 years, 2026-2030)
- Fair Value CAPE* (Vanguard, Shiller) is considered better for long-term forecasts (next ~10 years, 2026-2035)
- Expected Returns (Bogle) is considered best for very long-term forecasts (periods beyond 10 years, 2036+)
*Note: However, recent research (popularized by the Philosophical Economics blog) has shown that Average Investor Allocation to Equities is actually the single best (contrarian) predictor of 10-year returns, often outperforming the Shiller CAPE. This is a contrarian indicator: When the average household allocation to stocks exceeds 45%, subsequent 10-year returns have historically been very poor. The concerning prediction of this approach calls for negative returns over the next 10 years.
---
Up until now I've just used iERP for my full planning period because:
- I had to pick one method because many other retirement planning tools only allow a single forecast value for all future years, and I thought the next 5 years CAGR% was the most important for retirement planning purposes. (e.g., SORR)
- iERP best represents the current market-price derived view of future returns, and I don't think I'm smarter than the market.
- CAPE-based valuation methods have not predicted returns as well since ~1985, ignore many current market conditions, are backwards looking, and assume future reversion to historical long-term averages that may not well represent the current and future economy
---
Some quick digging uncovered the following current forecasts for US S&P 500:
- iERP predicts 5.5-5.9% real returns (CAGR%) over the next 5 years (2026-2030)
- An underappreciated point is that the iERP method DOES bake in significant multiple compression (CAPE revision). Damodaran currently predicts that Forward P/E ratios to compress from ~22.5x today to ~18.5x in 2030. The average Forward P/E ratio over the past 25 years is 16.75x
- Expected Return method predicts 5% real returns (CAGR%) in the very long term (2036+)
---
I plan to next explore how a multi-period term structure of capital market assumptions affects base case retirement forecasts differently from single period forecasts and how we might hedge the downside risks differently given the term structure.
I'm wondering whether a 3-period forecast approach something like this might make sense:
Real Returns (CAGR%) by period (Speculative approach)
-
- 2026-2030: ~5.5-5.9% based on iERP
- 2031-2035: ~4.8% based on Expected Returns method + valuation compression to return Forward P/E ratio to 16.75x
- 2036+: ~5% based on Expected Returns method
I plan to next explore how a multi-period term structure of capital market assumptions affects base case retirement forecasts differently from single period forecasts and how we might hedge the downside risks differently given the term structure.
I'm wondering whether a 3-period forecast approach something like this might make sense:
Real Returns (CAGR%) by period (Speculative approach)
- 2026-2030: ~5.5-5.9% based on iERP
- 2031-2035: ~4.8% based on Expected Returns method + valuation compression to return Forward P/E ratio to 16.75x
- 2036+: ~5% based on Expected Returns meth
Here’s the rub: the amount of uncertainty around all three of your estimates is huge. (And it couldn’t be otherwise, or there wouldn't exist such a large ERP as we have!)
So getting as nuanced as you're doing doesn't make sense to me personally. If there was a larger trend, it might make a difference. But would you really trust decisions like roth conversions on that?
In my own pralana I've simply been averaging the two big models and just using that for all time periods. Research Affiliates site has a neat feature that lets you "mix and match" any proportion of their Valuation and Growth&Yield estimates, depending on your confidence about either model. (I use 50/50.)
My brief summary of conclusions, excluding the rationale:
- iERP (Damodaran) is considered better for mid-term forecasts (next ~5 years, 2026-2030)
- Fair Value CAPE* (Vanguard, Shiller) is considered better for long-term forecasts (next ~10 years, 2026-2035)
- Expected Returns (Bogle) is considered best for very long-term forecasts (periods beyond 10 years, 2036+)
And then there are different versions of each one. With CAPE: The simplest version is to take CAPE in reverse: look for the amount of return that justifies the current CAPE, which is simply the inverse of the CAPE (the CAPE yield). So today's cape of 40 literally implies a 1/40 or 2.5% 10y return. Others do a regression between various CAPEs and various past returns to find the line through the middle. This ends up being about 5.1%.
