How to Estimate a Future Rate of Return on Your Retirement Savings

Retirement Savings

Last Updated on March 12, 2024 by admin

Predicting the future is a dangerous game. Financial advisors attempt it every day and occasionally they get it right. Those market “experts” you see on stock watch sites are often merely stock promoters looking to drive up prices. You could make a few dollars a day trading on their advice, but they won’t help you plan for a healthy retirement. One thing that is certain is that your rate of return won’t matter if you’re buried in debt. Learn how to pay off debt first before turning your focus onto increasing return rates on your retirement savings. Market growth is offset by inflation, so returns constantly fluctuate. You’ll need to be able to dedicate your full attention to them if you plan to build wealth. Debt is a distraction from that. Once you’ve tackled your debt, look to these tips to estimate a future rate of return. 

Historical Returns for Stocks and Bonds

Over the past one hundred years, the stock market has averaged an annual rate of return of 10%. Inflation for that period has averaged 3%, though the Federal Reserve has made a commitment to try to keep it at 2%. Assuming they fail at that, and the averages hold, you’re looking at a 7% return on your stock investments. That’s not terrible. 

Intermediate-term bonds, which are viewed as a less volatile investment solution, have only produced a 5% return over the past century. Adjusted for inflation, that’s a 2% return. That won’t make you rich, but it’s a return you can safely bet on. Managed portfolios typically have a mixture of stocks and bonds to offset market volatility.  

An important point to note here is that these projected returns are for the entire market, not individual stocks. Attempting to beat the market by “picking winners” is a losing strategy that even financial advisors don’t use. If you’re looking to hedge your bets, consider investing in an index fund or ETF, which are both “baskets” of stocks rather than a single equity.    

Brace for the Downtrend After Post-Pandemic Bull Market

There are several factors that could skew a repeat of the historical return rates we’ve seen in the past hundred years. The most recent of these is the 2020 pandemic. After a downtrend that lasted just 33 days, the stock market went bullish. The S&P surged 90% and the Nasdaq went up 112%. That’s the highest first-year bull market return in history. 

What goes up must come down. Market experts, the real ones, are predicting lower returns over the next decade. Vanguard estimates stocks at 2.4% to 4.4%, with bond yield forecasts of 1.4% to 2.4%. Blackrock, which predicts in twenty-year increments, is expecting large-cap stock returns to be at 7% by 2041. It will take some time to get there though.    

The Bottom Line: Estimate Low and Plan Accordingly

Since this is all conjecture based on history, these numbers could be wrong, but economists and market analysts agree that conservative estimates are best in a time of uncertainty. The market has averaged 10% for the last century. So, for argument’s sake, let’s say we can expect to get half of that in the next twenty to thirty years. That’s the rate of return you can conservatively expect on your retirement savings. Plan accordingly.   


Read More: Five Crucial Retirement Planning Tips for U.S. Citizens

Apart from that, if you are interested to know about 5 Features of Digital Savings Account then visit our Finance category.

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Sophia Anderson is a finance writer and blogger with a passion for helping people improve their financial literacy. With over 5 years of experience in the finance industry, Sophia has worked with individuals, families, and small businesses to provide financial advice and guidance. Her expertise includes budgeting, saving, credit management, and debt reduction. Sophia is dedicated to breaking down complex financial concepts into easy-to-understand language and empowering her readers to make smart financial decisions. She is a frequent contributor to financial publications and has written extensively on topics such as personal finance, investing, and financial planning. Sophia's mission is to help people take control of their finances and achieve financial security and freedom. When she's not writing, Sophia enjoys hiking, practicing yoga, and reading personal finance books.