Retirement income planning is extremely dependent on the rate of return assumptions used. Financial Planners generally use a portfolio approach to investment planning in which assets are invested in several different types of financial investments to diversify risk.
The mix of the portfolio will depend on the investor's goals and risk tolerance. All this is way beyond the role of the family lawyer, but to calculate this report, assumptions on return are needed.
You may talk to a financial planner about setting reasonable return figures. Based on historical performance, stocks would be expected to earn 10% per year. In the 1990s, stock performance greatly exceeded this, but stock market returns have been negative in some recent years. Bond yields will depend on interest rate markets and corporate bonds will carry higher rates than government bonds.
On December 31, 2011 the following interest rates were available:
2 Year Treasury 0.25%
10 Year Treasury 1.89%
30 Year Treasury 2.89%
2 Year 1.07%
10 Year 3.45%
Source: www.treasury.gov. Verify rates at time of valuation.
While inflation has averaged under 2% in several recent years. It reached 3% in 2000 and 3.5% for 2005 due to energy price increases and, historically it has been even higher. Existing bond yields reflect the expected inflation rate, so should inflation be higher, bond yields would be expected to reflect a higher inflation rate and would also be higher.
It is suggested that you discuss the interest rate for annuity purchases (what an insurance company will charge to provide a life annuity from a lump sum) with your local financial expert. In general, the rate will probably be similar to a 10-year Treasury rate.
Annuities have costs involved and should be expected to yield less than current market rates, but current market rates for annuities are a blend of corporate and government issue rates.
See also:
Estimating Retirement Income - General