What is the Average Rate of Return? What to Use in Your Retirement Plan Projections?

Rate of return refers to the gain or loss on an investment relative to the amount invested, usually expressed as a percentage. It measures the profitability or performance of an investment over a specific period. Assessing your average rate of return is important for at least two reasons. It helps you to determine: 1) How well you have done with your investments to date and 2) How your money may grow into the future.

what rate of return to use for retirement projections

Average Rate of Return as an Indicator of Past Investment Success

The average rate of return helps assess the historical performance of an investment or portfolio. By analyzing the average returns over a specific period, investors can evaluate the profitability and efficiency of their investment decisions. It provides a quantitative measure to compare the performance of different investments and determine which ones have performed better.

Average Rate of Return to Predict Future Growth

When making financial projections or planning for future investment goals, understanding the average rate of return is crucial. It helps estimate the potential growth of an investment over time and allows individuals to project the value of their investment portfolio in the future. By incorporating the average rate of return into projections, investors can set realistic expectations, make appropriate financial plans, and track progress towards their goals.

What Average Rate of Return Should I Use In My Retirement Plan Projections?

At NewRetirement, we get this question a lot. And, there is simply no easy answer.

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.

However, here are a few tips to help you and some historic data for pessimistic, average, and optimistic rates of return on different asset classes:

Use the right time frame

If you were to assess the average rate of return on your investments from December 2021 through September 2022, odds are that things would look pretty dismal. Most stock investments loss money during this time period and you would likely see losses, not growth.

However, if you were invested in an index fund tracking the S&P 500 and were to assess the last 5 years, you would have an average rate of return of over 11%.

The time frame for your assessment really matters.

For most investments, the longer the time frame, the more reliable your the average rate of return is likely to be. A longer time frame will account for the very highs and the very lows and give you a number based on a long history.

Remember that past performance does not guarantee future results

You have heard it before, “Past performance is not a guarantee of future results.” And, external factors can change over time, impacting future returns. Economic, political, or technological shifts can disrupt traditional patterns and affect investment performance.

An historical perspective is valuable when determining rate of return for projections. The longer time frame provides more data for analysis. However, it needs to be complemented with other factors, such as current market conditions, economic indicators, and individual investment characteristics, to form a comprehensive projection.

Use a long term average rate of return for money you will keep invested for a long period of time

If your money will be invested for 5-10 years or longer and you have a year or two wiggle room for when you will need to withdraw the funds, then the long term average rate of return on your particular investment portfolio could be a good number to use for projections.

So, if you are invested in the S&P 500, you might want to use 9% which is the average return per year over the last 150 years.

Evaluate fluctuations if your money will be invested for a shorter time period

If projecting a rate of return for a relatively short time period, you may want to understand the range of possibilities that might make up the average rate of return on your particular investments.

You may want to use a greater range between optimistic and pessimistic assumptions to account for the possibility of a greater range of outcomes.

Determine if you are calculating total rate of return on an account or on an individual position

In the NewRetirement Planner, you can link accounts and make projections based on the total returns of all investments in the account.

To determine the historical rate of return for your current portfolio, you will want to:

  • Multiply the percent of your portfolio a holding represents by the historic rate of return on that holding. So, if an index fund represents 75% of your portfolio and you want to use a 9% rate of return, the product would .75 multplied by .09. The product is: .0675
  • Do the same for all holdings in your portfolio
  • Add all of the products together and this will be the rate of return on your portfolio

Familiarize yourself with average returns by 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.

See below for information on average returns by asset class.

Know the difference between linear and variable (Monte Carlo) projections

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.


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.)

Know if you are calculating real vs. nominal rates of return

Rates of return can be calculated in a variety of ways. Two important methods are:

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.

Understand how your portfolio 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.

NOTE: 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.

Update your rates of return at regular intervals

Regular monitoring and adjustments to the retirement plan are essential to ensure it remains aligned with one’s financial goals and changing market dynamics.

Average Rates of Return for Different Types of Investments

Here is some benchmark historical average rates of return for some different types of investments.

The long term average rate of return for the S&P 500

The average rate of return for the S&P 500 over the last 150 years is 9.098%. (Adjusted for inflation, the average annual real return is 6.829%.)

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

Historic (1926-2022) returns for different portfolios

Fidelity Investments has analysis showing (for 1926-2022) the historic average, worst 12-month return, best 12-month return, worst 12 month return, and best 20-year return for different types of portfolios. A portfolio represents a range of investment types in percentages that are designed to offer conservative or riskier returns:

On a conservative portfolio (6% foreign stock, 14% US stock, 30% short-term investments and 50% bonds) annual historic returns are:

  • 5.75% average annual return
  • 17.76% average return for the worst 12 months
  • 31.06% average return the best 12 months
  • 2.92% average for the worst 20 year period
  • 10.98% average for the best 20-year period

With a balanced portfolio (15% foreign stock, 35% US stock, 10% short-term investments and 40% bonds) annual historic returns are:

  • 7.74% average annual return
  • -40.64% average return for the worst 12 months
  • 76.57% average return for the best 12 months
  • 3.34% average for the worst 20 year period
  • 13.84% average for the best 20 year period

With a growth portfolio (21% foreign stock, 49% US stock, 5% short-term investments and 25% bonds) annual historic returns are:

  • 8.75% average annual return
  • -52.92% average return for the worst 12 months
  • 109.55% average return for the best 12 months
  • 3.01% average for the worst 20 year period
  • 15.34% average for the best 20 year period

With an aggressive portfolio (25% foreign stock, 60% US stock, 0% short-term investments and 15% bonds) annual historic returns are:

  • 9.54% average annual return
  • -560.78% average return for the worst 12 months
  • 136.07% average return for the best 12 months
  • 2.66% average for the worst 20 year period
  • 16.49% average for the best 20 year period

20-year averages by some asset classes

Recent 20-year annualized returns by asset class are:

  • REITs: 9.5%
  • Gold: 8.65%
  • S&P 500: 10.05%
  • Bonds: 4.017%
  • Homes: 3.97%

BlackRock’s capital market assumptions

Blackrock has a nifty tool to help you project a rate of return. They look at historical data as well as current market conditions to suggest a range of future return possibilities. Here is a sampling of information from the Black Rock tool for asset return expectations.

Here is a sampling:

  • For the next 5 years, the expectation for U.S. equities is: optimistically at 13.9%, expected at 7.7%, and pessimistcally at 1.7%
  • For the next 15 years, the expectation is: optimistically at 11.7%, expected at 7.5%, and pessimistically at 3.3%

Notice that the longer time frame has a narrower range of results.

You can use the tool to look up the types of assets you hold and assess their return expectations for different time periods (5, 10, 15, 20, 25, or 30 years).

So, What Rate of Return Should You Use for Your Retirement Plan Projections?

As you can see, there is really no one size fits all answer to this question. You want to understand the asset allocation of your portfolio and the historic performance of each holding. And, also consider your time horizon.

It is also a good idea to evaluate your plan with a range of optimistic, pessimistic, and average rates of return as well as Monte Carlo analysis and get comfortable with the range of possible future outcomes.

The NewRetirement Planner enables anyone – free and Plus subscribers – to evaluate a spectrum future results and Plus users can change the projected rates of return to match their specific investments.

Log in anytime to assess and update your rates of return.

Unsure? Get professional help. Collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from NewRetirement Advisors to identify your target asset allocation and reasonable rates of return to use in your projections. Rather than making money on your money NewRetirement Advisors charge a flat-fee based on your needs, not a percentage of your assets. Learn more and book a FREE discovery session.

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. 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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