A 12% retirement return assumption is 'absolutely nuts,' expert says. Here's a realistic rate to expect (2024)

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When you invest toward retirement, experts often like to say you are letting your money work for you. But how much can you realistically expect to earn on your money?

The annual rate of return — defined as the percentage change in an investment's value — is an estimate of the gains you may earn over time.

Exactly how much you can expect to earn per year on average has been the subject of debate.

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A 25-year-old who invests $100 per month in an S&P 500 index fund in a Roth individual retirement account until they are 65 may see a 12% annual rate of return over 40 years, personal finance expert Suze Orman recently told The Wall Street Journal in an interview. Dave Ramsey has long called for a 12% return estimate in his calculations.

However, David Blanchett, managing director and head of retirement research at PGIM DC Solutions, is seeking to debunk the idea of 12% return assumptions. Among other reasons, that rate of return is "absolutely nuts" because it doesn't incorporate volatility or inflation, Blanchett said.

He said a more reasonable return assumption is 5% for a balanced portfolio of stocks and bonds or 7% for a more aggressive exposure to stocks.

Return assumptions as a lesson on compounding

The point of her example was not to expect a 12% average rate of return on your money, Orman told CNBC.com. Instead, it was intended to teach young investors what time and compounding can do, she said.

"You have no idea how many kids have said to me, 'When I heard that I immediately opened a Roth IRA, I immediately started to put money in it,'" Orman said.

Young investors should start right now and should not wait, she said. The reason comes down to a concept called compound interest — that both the money you initially invest and the interest earned on that money will continue to grow.

A 12% retirement return assumption is 'absolutely nuts,' expert says. Here's a realistic rate to expect (1)

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Those investors start to learn that — no matter the return — it's better to start at age 25 versus 35, she said.

"Every year that you wait, you have less time for your money to compound," Orman said. "The less time you have for your money to compound, the less money you could have."

Moreover, investing through a post-tax Roth IRA account versus a pretax traditional retirement account may help boost your returns, as tax rates may increase in the future.

Ramsey was not available for comment.

Why 12% is an optimistic benchmark

There's a reason that 12% tends to be used as a benchmark, according to Blanchett. The average historical return from 1926 to 2023 is 12.2%, according to a monthly data set called stocks, bonds, bills and inflation, or SBBI.

But that is based on a simple arithmetic return, which may not accurately reflect all fluctuations, according to Blanchett.

For example, if you have $100 and your portfolio goes up 100%, you now have $200. But if it then goes down 50%, that brings you back to $100. The average return, by taking the 100% and negative 50% returns and dividing by two, would be positive 25%. Yet your realized return would be 0%, as you are back to your original $100 balance, Blanchett said.

Another more complicated calculation used by experts, known as compounded or geometric returns, would better account for those fluctuations, he said.

"It's just the impact of negative returns that hurt you so much," Blanchett said.

How much retirement savers can expect to earn

So how much can you realistically expect to earn on your retirement investments?

"I would tell them 4% to 6%," Orman said.

The two different returns Orman cites serve different purposes, she said. The first example, with a 12% average rate of return, is to illustrate the power of compounding. The second is a lesson to anticipate a conservative return, "because you never know what can happen in life," Orman said.

Orman's conservative estimate is in line with Blanchett's 5%.

Investors saving for retirement may see tools that provide return projections. However, it is important to be mindful of how those anticipated rates of return are determined.

For example, Fidelity provides a balance projection for a NetBenefits accountholder's next milestone age that anticipates a 3.5% return, among other assumptions. Because those time frames tend to be shorter, using historical returns is not necessarily the best strategy for those estimates, nor is it intended to be a long-term growth assumption, according to the firm.

How your personal rate of return may vary

Of course, no rates of return are guaranteed.

Much of the rate you may anticipate earning on your investments depends on your personal asset allocation, said Brian Spinelli, a certified financial planner and co-chief investment officer at Halbert Hargrove Global Advisors in Long Beach, California, which was No. 8 on CNBC's FA 100 list in 2023.

Investors in workplace retirement accounts typically have a limited menu of options from which to choose. If they opt for greater exposure to bonds or stable value funds, they can expect more muted returns compared with someone who is more heavily invested in stocks, Spinelli said.

The goal is to match those allocations to your time horizon, which typically means reducing the size of your stock investments the closer you get to your anticipated retirement date.

Generally, investors should not have major asset allocation shifts from month to month, quarter to quarter or even year to year, according to Spinelli.

It also helps to pay attention to the fees you may be charged on your investments, he noted. Fees eat into your returns.

To stay the course, it helps to anticipate a certain amount of volatility from the outset, he said. By selling and sitting on the sidelines and waiting for the market to recover, you may miss the market's best performance days.

"In order to get those returns, you have to stay in it," Spinelli said. "You cannot try to market-time and try to get out and expect yourself to get back in at the lows, because [you] probably won't make that decision."

A 12% retirement return assumption is 'absolutely nuts,' expert says. Here's a realistic rate to expect (2024)


What is a realistic rate of return for retirement? ›

Many consider a conservative rate of return in retirement 10% or less because of historical returns. Here's what you need to know. Need help planning for retirement? A financial advisor can help you manage your portfolio, figure out how much income you'll need and assist in other important decisions.

Is 12 return realistic? ›

There's a reason that 12% tends to be used as a benchmark, according to Blanchett. The average historical return from 1926 to 2023 is 12.2%, according to a monthly data set called stocks, bonds, bills and inflation, or SBBI.

Is a 7% return realistic? ›

While quite a few personal finance pundits have suggested that a stock investor can expect a 12% annual return, when you incorporate the impact of volatility and inflation, 7% is a more accurate historical estimate for an aggressive investor (someone primarily invested in stocks), and 5% would be more appropriate for ...

What is a safe interest rate to assume for retirement? ›

If you want to be conservative, you could go with 1% to 3%. If you are feeling more optimistic, you could choose 6% to 8%.

What is the expected rate of return on a retirement account? ›

Many retirement planners suggest the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions. But your 401(k) return depends on different factors like your contributions, investment selection and fees.

What is a realistic retirement income? ›

After analyzing many scenarios, we found that 75% is a good starting point to consider for your income replacement rate. This means that if you make $100,000 shortly before retirement, you can start to plan using the ballpark expectation that you'll need about $75,000 a year to live on in retirement.

Is 12% a good return on investment? ›

While the term good is subjective, many professionals consider a good ROI to be 10.5% or greater for investments in stocks. This number is the standard because it's the average return of the S&P 500 , an index that serves as a benchmark of the overall performance of the U.S. stock market.

How much does Dave Ramsey say you need to retire? ›

Some folks will need $10 million to have the kind of retirement lifestyle they've always dreamed about. Others can comfortably live out their golden years with a $1 million nest egg. There's no right or wrong answer here—it all depends on how you want to live in retirement!

How long does it take to double your money with a 7% return? ›

What Is the Rule of 72?
Annual Rate of ReturnYears to Double
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Is 30% return possible? ›

A thirty percent return is an achievable feat for one year if you're aggressive enough (and shall I say lucky enough), AND have the stomach to ride out the volatility, but consistently performing year after year becomes an incredible challenge that no one to my knowledge has done.

What is the average rate of return on a 401k last 30 years? ›

Variable Rate of Return: Financial advisors often project an average rate of return for 401(k) plans between 5 to 8% over 20 to 30 years. However, this does not guarantee such returns due to market volatility and other factors.

How many people have $1,000,000 in retirement savings? ›

However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.

How long will $400,000 last in retirement? ›

Safe Withdrawal Rate

Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.

How long will $500,000 last in retirement? ›

According to the 4% rule, if you retire with $500,000 in assets, you should be able to withdraw $20,000 per year for 30 years or more. Moreover, investing this money in an annuity could provide a guaranteed annual income of $24,688 for those retiring at 55.

What is the $1000 a month rule for retirement? ›

The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).

What is a good rate of return on a pension? ›

Pension plans managed to obtain a positive real investment rate of return, net of investment expenses, in 2020 in the OECD area (at 4% on average) but lower than in 2019 (at 8%). Some of the largest pension markets (e.g. Canada, the Netherlands, Switzerland and the United States) even recorded gains above 5% in 2020.

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