Optimization Correction For 12 ETF Portfolio

Here are the following assumptions I used to create the portfolio shown below.  1)  The S&P 500 is assumed to grow at 7% per year.  This percentage is adjusted by setting the Delta Return to -3.3% inside the QPP software.  2) I used five years of data running from 2/6/2008 through 2/6/2013.  3) The Solver Parameters are listed below.

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Retirement Mistake #4: Overestimating Portfolio Return

Historically, the U.S. Stock Market has returned about 7% annually in excess of inflation.  Is this likely to continue?  Real earnings come from dividends, dividend growth, and P/E expansion.  Projecting future returns to match the historical level, which included one of the longest bull markets from August of 1982 through March of 2000 is not likely to be duplicated in the near future.  Further, dividend yields are below historical levels and P/E expansion is expected to slow.  When projecting S&P 500 growth rates, I am currently using 7.0% and that is likely high.  Six percent (6%) might be a more realistic figure.

This all sums up to retirement projections coming up short of the goal.  The solutions are rather grim if the growth rate of the market slows.

  • Save more.
  • Work longer.
  • Plan to live on less.
  • Take on a part-time job in retirement.
  • Hope for an inheritance.

While we use history as a guide, don’t plan on stock market returns repeating the performance of the last 50 years.  It is a mistake to do so.  Plan conservatively.  This includes future expenditures as well as the amount needed to be saved to meet retirement goals.