interesting graph. inflation cycles & ROR

[ronbuck]

www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html

I am pretty visual, so I like graphs. This is interesting. Especially since so many pension fund's solvency are dependent on projected 8% returns.

[spartan7886]

Remember that the projected 8% returns are before inflation and the graph is corrected for inflation. In that case, 8% returns are closer to 5% returns, which is higher than the 4.1% average return shown, but not quite as outlandish.

[Savoir Faire-Demogague in NJ]

I did not look at the link but are they mostly govt pension plans?

[ronbuck]

Jan 13, 2011 17:17:30 GMT -5 Savoir Faire-Demogague in NJ said:

I did not look at the link but are they mostly govt pension plans?

The link does't really deal with pension plans, just inflation adjusted rate of return since 1920. What struck me was what the inflation of the 1970s did to returns, and thinking about my expectations for inflation over the next 5-6 years.

But my belief is that a significant portion of state/local pensions are invested in the market...and at least some promised benefits were based on higher returns than are going to be likely over those same 5-6 years. Hard to guess beyond that. Hell, hard to guess the next 6 months.

[phil5185]

Neat graph, thanks.

What struck me was what the inflation of the 1970s did to returns, and thinking about my expectations for inflation over the next 5-6 years.

Yes - we could buy 10% one-year CDs. But the Jimmy Carter 14% hyperinflation ate your returns. The market had several 15% years, but inflation sometimes took most of it.
And today's cap gains taxes have been 15% max for only a few years - for the biggest part of the 90 yrs, the taxes were 25% or more. So, with a common 12% raw return on stocks you might lose 3% to inflation and 3% to taxes - ie, a net 6%.

the graph is corrected for inflation. In that case, 8% returns are closer to 5% returns, which is higher than the 4.1% average return shown,

And taxes too, maybe 1 to 2%. So 4.1% net makes sense.

[stantonjane]

Interesting chart. It illustrates what many of us suspected, that there are no guaranteed 8-10% returns, even over 20 years. I'd be tempted to put my savings under my mattress, but I know we're not dedicated enough to leave it there. Best thing about a 457 acct, we can't just raid it for the immediate emergency. Even at a 1% return, at least it's actually there in savings still.

[DVM gone riding]

and taxes--how do you adjust for taxes--I don't think any chart should adjust for taxes since they are constantly changing and very dependent on your personal situation. If you took away this "adjustment" then were would the graph be.

And if it is a 1% return adjusted for inflation that is really a 5% return so really it is a lot better then savings, which the interest rate is basically inflation dependent

[phil5185]

The graph shows a numerical value for 1979 to 1999 (2nd best 20 years), ie 8.2%/yr.
I looked up the nominal (uncorrected for inflation & taxes) SP500 return for that same period - it was 17.51%/yr. The inflation rate was 4.85% for that 20 yrs. Subtracting 17.51 - 4.85 - 8.2, that leaves 4.46% for taxes - ie, 25.5% of the nominal 17.51% return went to taxes.

Here's the Max Cap Gains rates for the 20 yrs - looks like 25% would be a close fit.

1979-80 ---- 28%
1981 --- 23.7%
1982-86 -- 20%
1987 --- 28%
1988-90 -- 28%/33%
1991-92 -- 28.9%
1993-96 -- 29.2%
1997-2000 -- 21.2%