Saturday, February 24, 2007

What is an acceptable rate of return (2)?

The rate of return that I need to achieve in order to retire at 50 has dropped to 6.1% pa.

In April last year I asked myself what rate of return was needed in order to achieve my objective of retiring at 50 with sufficient resources that there would be no draw down in capital? After using a number of different on line calculators and playing around with assumptions regarding future income levels for myself and Mrs Traineeinvestor (flat from present levels), inflation (3%) , current net worth and future financial needs, I came up with a required rate of return (before and after retirement) of 6.6% pa.

Having just watched another birthday come and go, I now have nine years left before my intended retirement date. Time to run the numbers again.

I think I have made the same assumptions as for last year's calculation subject only to increasing the nominal post-retirement required income to allow for a year's worth of inflation since the last calculation.

I was very pleased to find that he required rate of return had dropped to 6.1% pa. The reason for the drop is that our net worth increased by more than expected last year due to a combination of solid (if unspectacular) returns on our investments and increased savings (due to a rise in my income rather than any efforts at cutting expenditure).

While it is premature to start celebrating yet, a lot can go wrong over a period of nine years, my confidence in being able to retire at 50 is growing. Quite frankly, I would be disappointed if my investments only returned 6.1% - historical returns on the major asset classes have been higher than this. If a return of greater than 6.1% is earned, it raises the possibility of either (i) retiring before I turn 50 or (ii) increasing the standard of living in retirement.

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