What assumptions are typical in financial planning?

I’m running some financial simulations in software, and for each account there’s an “Effective Rate” for the investment in question.
I’ve got an S&P 500 account and a Vanguard Target Retirement 2040 Fund in there right now.
For the S&P account, I’m tempted to run with 8%, which seems to line up with historical results per:

not sure what to do with the Vanguard Target fund, though.


For the record, working with a desktop copy of J&L Financial Planner.

Some assumptions relate to the time frame and goals you’re working with. Long term assumptions tend to reflect long term historical trends, which is why investment advisers like to use 8%. Another reason, however, that they like to use that number is that it sounds so good to investors. Short term assumptions will have to reflect awareness of recent events and will be considerably lower. And, as Frontline recently pointed out, the whole thing’s pretty much a crapshoot and advisers have no inside track on any investment strategies. They said find an index fund and buy it. Period.

I honestly don’t mean to hijack the thread, but a common assumption is that you won’t go bankrupt from medical bills if you pay a reasonable amount for insurance. Before Obamacare, that was clearly not a safe assumption. The goal of universal health care was to make it a safe assumption, but after all the amendments and watering down, I don’t know if it is or not.

At any rate, that’s always been my biggest problem in budgeting for retirement. I own my house free and clear, I know what my expenses are, but I have no idea what would happen if, say, I got cancer and needed extended, expensive medical treatment.

Two things I’d like to share:

  • My investment timeline is 30-ish year. I’m not interested in timing the market.
  • I will consider moving my funds from the targeted fund to S&P 500 index products. That’s a different thread. Feel free to comfort yourself with the knowledge that I do have some reservations about using a target fund vs a Spyder.

It’s also crossed my mind that the proper way to simulate a target fund might be to make two accounts related to the target fund, then find out the expected ratio of equity vs bond during various ‘ages’ of the fund.
Then I could ‘readjust’ the asset allocation every 3 years to match the expected performance of the fund.

Good note. I do carry substantial health insurance through my blue-chip employer. As long as I am employed and there are no sea changes, I suspect I’ll have the kind of coverage that caps my out of pocket at half of my annual income.

I’m looking for “use 5% for your SPYDER, here is a cite, 8% is silly” or “8% is dead on, check this cite, here’s my supporting argument.”

What would you use as a number for Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) ?

I apologize in advance for not giving you the kind of answer you are looking for.

I don’t think “target” funds have been in existence long enough to come up with a good number. Furthermore, I don’t think that they are well enough defined in their investment strategy to come up with a number (I am speaking of them here as a group - I am sure that individually the prospectuses spell it out). When I invest in a Large Cap Growth Fund, I have a pretty good idea of what I am getting into without plowing through the prospectus, but I can’t say the same for a target fund, especially in regards to its strategy in winding down risk.

I am most certainly not a financial professional (you know this because I am not trying to sell you anything).

Feel free to run with 8%, but make sure to do the simulation with 4, 5, 6 & 7 so you can see where you will stand when things don’t go as planned. I think this is the only purpose of that kind of simulation. Remember, past performance does not blah blah blah (ok I sounded a bit like an fp there).

I realize you’re looking for specific numbers, but… When I was a finance major (which has little to do with financial planning), we used software with a really broad set of historic financial performance data, mostly by asset class. I think it was by Thomson Financial but it would have been before Thomson merged with Reuters so I’m sure it’s been rebranded by now, even if I could remember the name of the product.

I never worked in finance per se, but as an undergrad I definitely could have said “here, assets like your spyder averaged 5% over a 30 year period” with a few clicks of a button. I wouldn’t be surprised if a good financial planner could as well.

I agree with the advice to buy an index fund.

However, a financial adviser ought to be doing a lot more for you than picking some stocks. Most people need a lot of guidance on how much to save, what saving options they have, and then they need someone to help hold them accountable to their saving plan, especially if the markets take a turn for the worse and the best advice is to hold the course and not panic. Many financial advisers are not doing this very well… but they should be.