Question

Nelson has accumulated $168,000 in his retirement account. He is 65 years old and plans to retire this fall. He's trying to determine how much income he will have to live on during his retirement years. Nelson is a relatively conservative investor and has decided that he wants to keep his retirement funds invested 60 percent in long-term corporate bonds and 40 percent in stocks. He is estimating that he will earn an average annual rate of return of 12 percent. Is Nelson's expected rate of return reasonable given the historical record from 1926-2015? Justify your response.

Answer 1

Nelson is expecting a higher rate of return on overall investment because the rate of return which he will be earning on long-term corporate Bond and in stock will be much lower because the compounded rate of return for stocks in these specific period have been near to 8% whereas bonds will be e returning him after being adjusted for inflation to the extent of only 5%, so this is a higher than normal estimate kind of expectation which will be having a lesser possibility of being fulfilled by the market.

An estimate of 12% is not a reasonable rate of return according to me because his allocation is also saturated highly into the corporate bonds and those bonds are generally not returning this much of Return because double digit rate of return can only be made after active investment into the stock markets and not having a highly passive portfolio which will only have 40% of concentration of stock so according to me the expected rate of return of Nelson has been unreasonable in accordance with the historical mean rate of return.