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-   -   Personal financial plan assumptions (http://www.actuarialoutpost.com/actuarial_discussion_forum/showthread.php?t=332302)

fdsafdsa 05-16-2018 11:04 AM

Personal financial plan assumptions
 
I'm guessing I'm not the only one with a financial planning tool of some sort. Curious what range of assumptions we are using as actuaries, as well as what sorts of decisions you've made using your tool

Inflation: 2%
Long term Risk free rate: 4%
Long term diversified equity: 6%
Long term home appreciation: 4%
Death age: 90 (if I'm out of money then, who cares, I probably won't know what's going on anyway)
Decisions made: Portfolio allocation / tax optimization up to now, considering using it for a much bigger decision soon, part of why I'm benchmarking.

Overall I think my equity may be a bit conservative, risk free and home appreciation may be a bit aggressive, inflation also misses the possibility of return to higher inflation environment, implicit in my decision making would be underlying risk premiums would come up too.

tommie frazier 05-16-2018 11:19 AM

I use 2-2.5% for both inflation and home appreciation. that varies by location maybe.

I don't assume a death age.

you left out withdrawal rate, starting age, and inflation on the withdrawal.

fdsafdsa 05-16-2018 11:20 AM

Quote:

Originally Posted by tommie frazier (Post 9324413)
I use 2-2.5% for both inflation and home appreciation. that varies by location maybe.

I don't assume a death age.

you left out withdrawal rate, starting age, and inflation on the withdrawal.

Withdrawal rate becomes a variable solved for based on death age. Inflation applies to the withdrawal. Starting age is also a variable to me to solve for.

yoyo 05-16-2018 11:51 AM

inflation ex medical: 3%
med inflation: 6%
total portfolio return (stock & bond mix, domestic & international): 5%
planning to age 100, die with money left over even though we have no desire to leave a financial legacy

George Frankly 05-16-2018 12:18 PM

Quote:

Originally Posted by fdsafdsa (Post 9324384)
I'm guessing I'm not the only one with a financial planning tool of some sort. Curious what range of assumptions we are using as actuaries, as well as what sorts of decisions you've made using your tool

Inflation: 2%
Long term Risk free rate: 4%
Long term diversified equity: 6%
Long term home appreciation: 4%
Death age: 90 (if I'm out of money then, who cares, I probably won't know what's going on anyway)
Decisions made: Portfolio allocation / tax optimization up to now, considering using it for a much bigger decision soon, part of why I'm benchmarking.

Overall I think my equity may be a bit conservative, risk free and home appreciation may be a bit aggressive, inflation also misses the possibility of return to higher inflation environment, implicit in my decision making would be underlying risk premiums would come up too.

I typically throw in 3% inflation and 7-8% gain (I'm about 90% equities) as my starting point. Home inflation is 3% in my model, the CO market has obviously exceeded that but I'm not banking on that trend continuing.

A recession will throw a wrench in all of my assumptions, at least over the short and medium term. So I view this as a sort of Bayesian approach, build a model, save a bunch of money, and then update things as I go.

Many others here have pointed out tools like firecalc, I'm kind of running with the approach of getting to a point where I'm covered in 95%+ of all scenarios as the point where I ramp down and think about retiring very soon. I'm still about a decade away, at current assumptions.

George Frankly 05-16-2018 12:20 PM

Quote:

Originally Posted by yoyo (Post 9324495)
inflation ex medical: 3%
med inflation: 6%
total portfolio return (stock & bond mix, domestic & international): 5%
planning to age 100, die with money left over even though we have no desire to leave a financial legacy

I don't have a medical inflation number, but I quite like this. I suspect you're right, that at least for the foreseeable future, medical costs aren't coming down. Sorry Trumpians, I'm not yet convinced.

And this is huge if you want to retire early - bridging the coverage gap between employer-sponsored insurance and Medicare.

Mr F 05-16-2018 12:43 PM

- Investment return, net inflation: I play around with 3-5%.
- Home appreciation, net inflation: 0%
- Salary growth, net inflation: 0%, with adjustments for reduction/increase in work hours as little one(s) grow up (currently Mrs F and I are both varying degrees of part-time and stay home with Baby F, that will fluctuate over time)
- Death age: Plan is to have passive income that exceeds costs with a buffer, so not terribly worried about this one.
- Taxes are estimated on taxable or tax-deferred accounts, at around the same rates as now or a bit higher, though recognized income is expected to be lower than today.
- Expenses are estimated mostly the same as today with inflation, with some categories adjusted (more for medical, etc.).

House payoff around when Baby F goes to college. Will assess retirement start date as we go along. I play around with 3-4% on withdrawal rate.

yoyo 05-16-2018 12:53 PM

Quote:

Originally Posted by George Frankly (Post 9324572)
I don't have a medical inflation number, but I quite like this. I suspect you're right, that at least for the foreseeable future, medical costs aren't coming down. Sorry Trumpians, I'm not yet convinced.

And this is huge if you want to retire early - bridging the coverage gap between employer-sponsored insurance and Medicare.

lol, could be said of the T team or the O team

George Frankly 05-16-2018 12:59 PM

Quote:

Originally Posted by yoyo (Post 9324647)
lol, could be said of the T team or the O team

Yeah, tbf no politician really has the... political capital I guess... to do something that will reign in medical cost in any meaningful way. The ACA did help early retirees with OOP costs.

At any rate, we'll leave that for Political. Ha.

A Student 05-16-2018 01:00 PM

For equity returns, I do stochastic analysis drawing from monthly S&P returns over the past 70 years.

Bond returns are based on the current yield of an intermediate index.

I assume 2-3% inflation on monthly expenses.

I don't include the house as an asset, it is a reduction in housing costs, so no appreciation assumed.

I assume immortality (until proven wrong), so inflated expenses must be covered in perpetuity.


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