You almost certainly are too optimistic about how fast your retirement portfolio will grow.
And that could cause grave problems for you in coming years. A too-high return assumption leads you to withdraw too much from your portfolio early in your retirement—thereby shortchanging your later years.
This is why a realistic rate of return is perhaps the most important single input to a sound financial plan. Unfortunately, given our tendency to extrapolate the recent past into the future, stocks’ and bonds’ extraordinary returns in recent years have encouraged many of you to be even more unrealistic than you were before.
The reason to avoid extrapolating the recent past into the future is most easily understood as it applies to the bond market. Bonds have produced impressive returns over the last couple of decades as interest rates have declined,…
