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I receive Mike Piper’s Oblivious Investor newsletter. Today I saw the above interesting title of an article he linked to
The question was: What is the lowest risk-free, after-tax, after-inflation rate of return you would accept in order to forgo all other investment opportunities for the rest of your life?1
Although the article itself was waaaay too technical for my pion mind, my knee jerk answer was 2%. I’m not greedy.
What is your answer?
“If you’re merely matching inflation, you’ll fall ever further behind your neighbors.”
While the above is true, it has never been a motivator for me.
I don’t find certain competitions to be beneficial. Looking down upon others or seeking approval isn’t a good approach. I’ve preferred to set a goal, not too low nor too high. Too low and I may not achieve the necessary financial stability or the ability to fund all of my lifetime goals. Too high, and I might take unnecessary risks, or do dumb things.
Once a goal is achieved one can always reflect on the progress made and raise the bar. I prefer continuous achievement while expanding the envelope. It’s one of the reasons I’ve been diligent and thorough with my numbers.
Interesting question. I recall back in the late ’90’s, when I was studying our various investment options, I was trying to answer this very question, even though I wouldn’t have put it in quite as technical terms. After floundering around looking at different options, I stumbled onto I-Bonds, which at the time were paying 3%+ the posted inflation rate, and I had found my answer. I recall at the time, thinking that if I had the opportunity to put all of our (retirement) savings into that vehicle, I would have done it. Of course, I couldn’t do this, and the rate didn’t last. But with the hindsight now of 25 years I realize I could have done much worse, and it would have taken the better part of 20 years for a 60/40 portfolio to even equal the performance of those rock-steady I-bonds, with a lot more ups and downs. I’m sure different time periods would probably produce different results, but I’m only interested in ONE time period–my own.
I think for this question, it’s OK to have a variable answer. When we are younger, we probably need to set our sights a little higher than 3%; when we reach the decumulation phase, something a little less than 3% would probably serve us fairly well, maybe even as low as the 1-2% range. Our time horizon gets shorter, volatility isn’t our friend, and we should have long since matured past our “Keeping up with the Jones’s” phase.
Sorry for the cliche … “But once you’ve won the game stop playing”
When I read the article when it came out, I thought to myself 3%. I was a bit surprised this was in the range considered reasonable in the conclusions: “Depending on your personal degree of risk-aversion, expected blended tax rate, and confidence in earning risk-adjusted returns in excess of those offered by broad public market portfolios, we think your answer to our question could reasonably fall somewhere between 2.5% to 6% above inflation, a pretty wide range. For investors that have most of their savings in taxable form, the range is quite a bit narrower, more like 2.5% – 4% above inflation.” Then there can be quibbling about how inflation is measured and also whether that applies to one’s personal inflation. I can’t say I have much more than anecdotal personal data, but Id say our personal inflation is a couple of % higher than the CPI, led by medical and food cost.
I guess I’m somewhere in between.
My reaction was 3%.
My goal on fixed income is 2% after taxes and inflation. Equity, I would say 4% after taxes and inflation, but that is for our inheritance. That would average out to 3% with our 50/50 AA. We do not need that for our needs.
if we use 3 Pct inflation and a tax rate of
33 Pct, you would need a 7.5 Pct return
on fixed income to meet the 2 Pct goal.
Is this really possible without a bond
trading approach.
Perhaps you are including Preferreds,
REITS, etc. but those bring higher
risks.
Back in the late 90s a friend and colleague was looking at a potential forced early retirement due to a merger and plant shutdown. There wasn’t a lot of retirement planning tools available, so he built his own. I consulted a bit on the development and results of his analysis. He was well-prepared for retirement with a pension, ample savings, and a frugal lifestyle. His analysis showed that as long as his portfolio beat inflation by about 1%, he could maintain his (inflation adjusted) lifestyle forever. That lesson stuck with me, the importance of some form of inflation protection to maintain your lifestyle.
4%…just so there would actually be an increase, after average inflation…or to offset the 4% withdrawal ratio most advisors use.
4% . It would offset the four percentage withdrawal rate. We already have enough, we don’t need more, we just don’t want to lose it
2%? What do you think about the Fed’s 2% inflation target?
The question is: “What is the lowest risk-free, after-tax, after-inflation rate of return you would accept in.
I’m not greedy. If my portfolio grows 2% above inflation we should be golden.
I am a regular reader of David Enna’s Tipswatch blog. In a 3/16/2025 post he wrote:
Opinion: If you can find 10-year TIPS with a real yield at or near 2.0%, it is a worthwhile investment, as long as you can hold to maturity.
I agree with Mr. Enna. TIPS up to 10 years to maturity at 2% above inflation and as risk free as possible are good portfolio ballast for me.
I have been buying 5 and 10 year TIPS at original auction or reopening, with no commission, with a goal to build a rolling 10 year ladder of TIPS and plan to hold to maturity as the major part of the fixed income portion of my portfolio.
For the equity portion of my portfolio I favor the low cost broad based world equity index funds and I hope those funds will not be needed in our lifetimes.
Understood. Thanks for replying.
I agree with bbbobbins, if I keep up with inflation, why do I need anything more? (Assuming I was happy with where I was.)
I think the article falls down because in the real world there is no such thing as zero risk and inflation protection in products doesn’t perfectly address personal inflation rate.
So they start doing maths with data that is not truly risk-free after (personal) inflation.
The reality is that in accumulation phase people do need to assume risk to get growth in real terms (and history has proven this to be a reasonable plan).
In decumulation phase the primary point is that people should be concerned about protecting what they have – hence guaranteed protection should be enough and any return above that is greedy.
Of course the accumulation/decumulation watershed need not align perfectly with retirement date. People can quite reasonably recognise that there is still money on the table by taking non-zero risk.
These are all obviously philosophical points but it is probably more of an insight into where people are at with their own personal number as to their answer for true zero risk, after all inflation than an indication of investment appetite.
An additional point: Standards of living rise not with inflation, but with per-capita GDP, which in the U.S. has climbed roughly two percentage points a year faster than inflation. If you’re merely matching inflation, you’ll fall ever further behind your neighbors.
Not something that ever worried me, but again, more important during accumulation. How much more “stuff” do I need at 78 in a CCRC? On the other hand, the CCRC’s fees may well rise faster than inflation, so 2% might be a good safety margin.
Very good point – Was kinda assuming the lifestyle inflation thing away. But you are right – same as accruing for access to as not yet available medical treatments which might have a premium attached.
Maybe I should just add a further point which probably goes beyond the scope of the OP but is philosophically interesting?
Should a true decumulator be bothered about keeping pace with the neighbours (which is usually about material things) as spec-flation (which might cynically be also viewed as bloat) occurs in products and services?
I know I’d like to train myself to be zen about that sort of thing but it’s hard.
The logical answer is 0% if you are confident you have the pot big enough. Guaranteed matching inflation at zero risk sounds pretty reasonable.
If you need to beat inflation to make your numbers in x years time then obviously you might want higher.
Ditto, David.
My investment plan in my working years assumed a 2% return after inflation and taxes. I stuck to it, initially with low-risk, fixed income investments. With a lot of financial good fortune, I far exceeded the goal. Having the modest assumption, however, convinced me early on to save diligently.