What Rates of Return Should You Use for Retirement Planning?

Predicting your rate of return is impossible without a working crystal ball. In other words, it is impossible. Nonetheless, you need to make a reasonable and educated guess in order to project your future finances. Historic average rates of return can be a good way to make a reasonable projection.

what rate of return to use for retirement projections

However, a reasonable average can be hard to pin down. The average can be vastly different depending on the specific time frame you consider, asset class, and how you are defining rate of return.

Factors to Consider With Rate of Return Projections

There are numerous factors to consider when projecting your rates of return, including:

Time Frame

An average rate of return can be vastly different depending on what time frame is being measured.

In general, you can see a lot of volatility in short time periods, and much less over the very long haul.

In other words, over short time periods you could see a much higher (or a much lower) rate of return. A longer time period can be “more” average, though major variability can be seen depending on the exact years being used, even over a 5- or 10-year average. One year of huge growth or losses can have an outsized impact on the average.

Asset Class

Reasonable projections for rates of return will vary greatly depending on the asset class. For example, are you projecting an individual stock, index fund, bond, commodity, or cash? In general, stocks have a higher (though more volatile) average rate of return than bonds.

When planning, you can project one blended rate of return for all of your investments, or project returns for:

  • Different accounts
  • Each asset class (stocks, bonds, cash, real estate)
  • By individual investment (a specific company stock, for example)

With the NewRetirement Planner you can try different scenarios for setting up your accounts and PlannerPlus users can specify specific rates of return and run different scenarios to assess future financial security for any type of account or asset class configuration.

And, with the NewRetirement PlannerPlus Monte Carlo functionality, higher rate of return investments (e.g. stock index funds) automatically carry a higher volatility characteristic than lower rate of return investments (e.g. bond funds).

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Real vs. Nominal

Nominal: Your nominal rate of return is the amount of money you make from an investment before factoring in expenses such as taxes, investment fees, and, most importantly, inflation.

Real: Your real rate of return is your actual rate of return minus those factors, particularly the inflation rate.

So, if your investments returned 7% in the last 12 months ending in October of 2021, your “real” rate of return for that time period is only 0.8%. (The annual inflation rate in the United States for the 12 months ending in October 2021 was 6.2% according to the U.S. Labor Department.) And that considers neither investment fees nor taxation.”

(7% minus 6.2% equals 0.8%.)

NOTE: In the NewRetirement Planner, you enter your nominal rate of return. Projections are in future dollars, inflating the cost of goods and services and using nominal returns over time. We also automatically model federal income taxation and capital gains tax. PlannerPlus members get state-specific income tax projections and can model what relocating to another state may do to their income tax burden.

Linear vs. Variable (Monte Carlo)

A linear projection uses one rate of return. That rate is applied to all future time periods. With retirement projections, a linear projection is meant to imply your average return for all future years (i.e. your assumptions are applied equally year over year).

However, linear projections will never be wholly accurate. Assets will rise and fall — sometimes dramatically — in different time periods.

Therefore, when planning for what might happen with your money in the future, it can be important to also consider possible (probable) fluctuations for your rate of return. A Monte Carlo analysis is designed to give you insight into that variability.

The NewRetirement Planner predicts your outcomes in 5 different ways:

  • Linear projections based on your optimistic rate of return
  • Linear projections based on your average rate of return (average between your optimistic and pessimistic)
  • Linear projections based on your pessimistic rate of return
  • Monte Carlo analysis that predicts a full range of possible outcomes based on thousands of different calculations.

NEW: Using the NewRetirement Planner, you can now model a future increase or decrease on your projected rates of return for both linear and Monte Carlo projections on individual accounts.


Sometimes historic rates of return are reported as a compound annual growth rate (CAGR).

In the NewRetirement Planner you should enter an annualized growth rate (not compound) and the system will assume reinvestment. (Or, you can model withdrawals if that is what you want to happen.)

Historic Rates of Return for Different Asset Classes

The Long Term Average Rate of Return for the S&P 500

The average rate of return for the S&P 500 is around 10%. (Adjusted for inflation, the average annual real return is 7%.)

However, there is huge variability by year. Between 1986 and 2019, the S&P 500 saw:

  • Highs of 31.49% in 2019, 31.5% in 1989, 32.39% in 2013, 33% in 1997, and 37.2% in 1995
  • Lows of -37% in 2008, -22.10% in 2002, and -9.1% in 2000

NOTE: The S&P’s year to date total return for 2021 is 25.97%.

20-Year Averages by Asset Class

According to J.P. Morgan, the following are the 20-year annualized returns by asset class for 1999–2018:

  • REITs: 9.9%
  • Gold: 7.75%
  • Oil: 7%
  • S&P 500: 5.6%
  • Bonds: 4.5%
  • Homes: 3.4%

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CAGR for the Last 93 Years for Different Asset Types

According to Morningstar, the compound annual growth rate (CAGR) for 1926 through 2019 was:

  • Small-cap stocks: 11.9%
  • Large-cap stocks: 10.2%
  • Government bonds: 5.5%
  • Treasury Bills: 2.2%

Historic CAGR for Different Asset Allocation Strategies

Fidelity reports historic compound annual growth rate (CAGR) for 1926–2020 by asset allocation strategy:

Conservative Strategy: For a conservative portfolio (50% bonds, 30% short-term investments, 14% US stock, and 6% foreign stock), the average CAGR is 5.96%.

  • The worst 12-month return was -17.67%
  • The best 12-month return was 31.06%

Balanced Strategy: For a balanced portfolio (40% bonds, 10% short-term investments, 35% US stock, and 15% foreign stock), the average CAGR is 7.98%.

  • The worst 12-month return was -40.64%
  • The best 12-month return was 76.57%

Growth: For a growth portfolio (25% bonds, 5% short-term investments, 49% US stock, and 21% foreign stock), the average CAGR is 9%.

  • The worst 12-month return was -52.92%
  • The best 12-month return was 109.55%

Aggressive Growth: For an aggressive growth portfolio (15% bonds, 0% short-term investments, 60% US stock, and 25% foreign stock), the average CAGR is 9.7%.

  • The worst 12-month return was -60.78%
  • The best 12-month return was 136.07%

Real Returns Over Different Time Periods

As reported on the A Wealth of Common Sense Blog, here are the real (after-inflation) returns for different time periods:

Over the last 5 years (2016–2020):

  • Stocks: 10.04%
  • Bonds: 3.41%
  • Cash: -0.57%

Over the last 10 years (2011–2020):

  • Stocks: 10.46%
  • Bonds: 3.06%
  • Cash: -1.01%

Last 25 years (1996–2020):

  • Stocks: 6.68%
  • Bonds: 3.27%
  • Cash: 0.02%

Last 50 years (1971–2020):

  • Stocks: 6.47%
  • Bonds: 3.39%
  • Cash: 0.76%

Last 100 years (1921–2020):

  • Stocks: 7.65%
  • Bonds: 2.68%
  • Cash: 0.76%

So, What Rates of Return Should You Use for Retirement Projections?

There is no wholly accurate way to answer this question. However, here are some tips:

Use Historic Averages (Carefully)

Okay, you have heard it before: “Past results are no guarantee of future performance.”

However, past results are a reasonably predictive metric, especially between different asset classes if you understand the factors listed above.

Enter Rate of Return by Asset Class (Or, Even Individual Holdings)

You can get more accurate projections by detailing your rates of return with as much specificity as possible.

Look up historic average rates of return by each of your specific investments.

Know Your Target Asset Allocation and How it Might Change in the Future

Your asset allocation should be determined by your goals, time horizon, and risk tolerance.

When any of those factors change, you may want to shift your target asset allocation (and therefore your projected rates of return).

Age is the most predictable factor that may change your target asset allocation.

You can use the NewRetirement Planner to change your rates of return at a future time. Project one rate of return now and then predict another rate of return starting on a future date.

Evaluate Optimistic, Pessimistic, and Monte Carlo Projections

With the NewRetirement Planner, you can project your rates of return using an optimistic and a pessimistic rate.

You can also evaluate your results using Monte Carlo projections.

By looking at these different metrics and even running multiple scenarios for optimistic and pessimistic (and changing your future returns) you can gain confidence that the money you need and want for the future will be there when you need and want it.

Understand Your Time Frames

If you will be holding an investment for a short period of time, be aware that you are at risk of greater volatility in the near term.

If you are holding an investment for a longer time period, then you can maybe more confidently use historic averages.

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About NewRetirement

For people who want clarity about their choices today and their financial security tomorrow, NewRetirement is a financial planning platform that gives people the ability to discover, design, and manage personalized paths to a secure future.

Our goal is to make high-quality, low-cost financial guidance available to everyone. More than 155,000 people representing more than $168 Billion in wealth currently trust the system to make the most of their money and time. The platform can be co-branded or white labeled for partners. Additionally, the company provides API access to companies who wish to embed planning functionality within their own site.

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