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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.