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How do I Model Asset Allocation and Account Rates of Return in My Plan?
How do I Model Asset Allocation and Account Rates of Return in My Plan?

This article discusses how to enter rate of return in your plan

Nancy Gates avatar
Written by Nancy Gates
Updated over a month ago

Financial planning by definition entails a wide variety of unknowns, and it's important to account for this inevitability when building a reliable plan. One significant unknown is the uncertainty of future returns.


What you may want to take into consideration

The Boldin software does not model any specific assets such as individual stocks, bonds, mutual funds, etfs, bonds or cash and you have the ability to model your asset allocation (which is the percentage of equities and fixed income you have in each account) by changing the optimistic and pessimistic Rates of Return.

Enter nominal rates, do not adjust for inflation.

The higher the optimistic rate of return, the more variability you’ll see in the Monte Carlo and vice versa.


Setting Rates of Return

A common approach is to use the historical return (reduced for any uncertainty you feel appropriate) as the Optimistic Rate of Return.

Optimistic

You may want to explore the Historical Averages to inform your Optimistic rate of return. If you would like to get more granular, you may want to utilize Portfolio Visualizer's Monte Carlo Simulation.

50% Equity (Total US Stock Market)

50% Fixed Income (US Intermediate Bond)

Average annual return: 8.1%

See this related article regarding your Pessimistic Rate of Return.


Overly optimistic assumptions may lead to negative outcomes such as an unexpected shortfall or lack of funding for long-term care. Overly pessimistic assumptions may create a variety of other issues such as restricting your spending and lifestyle in retirement, experiencing a higher than anticipated tax liability, and facing Medicare premium surcharges.


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