When planning for retirement, we must make projections for 30, 50 or more years. It is critical to make these projections in a realistic manner, such that the “simulated future” will bear reasonable likeness to actual experience of the financial markets. That is why we do not rely on overly simple assumptions of so called normal distribution of returns. We take into account the potentially large fluctuations in the values of investments that could occur over many years, including likelihood of market crashes, long sideways markets, as well as bubble runups. We have experienced such scenarios multiple times in the past few decades, and they cannot be disregarded in the future as well.
We model the “real market returns”, or rather -- market returns minus the rate of inflation. This enables us to avoid predicting the inflation rate, which is both difficult and very critical for one’s projections of future living expenses or the values of assets and liabilities. Modeling “real rates of return” allows us to keep our projections firmly grounded in units of today’s dollars, which is both easier to understand and, conveniently, much more reliable to simulate.