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Q&A: What Rate of Return Should You Use for Retirement Planning?

Q: What rate of return should a 20- or 30-something use when using a retirement planning calculator? (They are often preset to 6 or 8 percent). And does that include inflation? Depending on the assumptions I use, I get drastically different answers. On the low-end, I’m saving too little and on the high-end, I’m saving too much. What do you recommend? — Kimberly

Great question. As you’ve noticed, a small difference in your assumed rate of return can drastically change how much you need to save for retirement. Not to mention inflation and the income you’ll need in retirement.

Assumed rate of return 

I’ve seen people use everything between 5 percent and 12 percent for average annual returns over a lifetime of investing. But which rate of return is more accurate: 5 percent or 12 percent?

Maybe both. There are two big factors to consider:

  • Whether or not the assumed rate of return accounts for inflation.
  • The investment time period.


Historically, the U.S. inflation rate fluctuates between about 1.5 percent and 4 percent per year. So if you got a 10 percent return on your investments in a year that saw 3 percent inflation, your inflation-adjusted return is more like 7 percent (that’s an oversimplification of the math, but you get the idea). Remember, inflation is the whole reason you can’t just stash your savings in a bank account and expect to grow wealthy. If inflation is 3 percent and you’re only earning 2 percent, you’re losing money!

Investment period

How long you have to invest will impact the rate of return you can expect for a number of reasons. For one, the longer you have to invest, the more aggressive you can be with your asset allocation by favoring stocks and other more volatile — but potentially more rewarding — investments. In addition, the longer you invest, the more good years you will hopefully have to overcome the bad ones. This is also why it’s important not to get out of the market during a decline — you risk missing out on the bounce-back.

Some examples

I pulled some numbers using this calculator for the market’s average rate of return over three 30-year periods. I’ve shown the results both with and without inflation.


30-Year Period Before Inflation Adjusted for Inflation
1960-1989 10.30% 5.07%
1970-1999 13.78% 8.24%
1980-2009 11.29% 7.52%

I should note that these numbers are the compound annual growth rate (CAGR) which is a more accurate measure of market returns than a simple annualized average. For example, if you have an investment that goes up 100 percent one year and then slides 50 percent the next, you’ve made $0, yet the simple average return (100 – 50 / 2) is stated as 25 percent. The CAGR would be 0 percent.

As you can see, inflation-adjusted average returns for the S&P 500 have been between 5 and 8 percent over a few selected 30-year periods. The bottom line is that using a rate of return of 6 or 7 percent is a good bet for your retirement planning. I’ll use 6 percent because I — like many of you I polled on our Facebook page last week — would rather be conservative and save more than be overly optimistic and wind up short in 30 years.

What do you think? What assumptions about rate of return and other variables do you use when planning how much to save for retirement?

Published or updated on February 22, 2013

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. John says:

    You also have to count fee’s into the equation. Sometimes 2% with active management and advisor.

  2. Jessica says:

    USAA just put out a calculator yesterday quoting a Robert Schiller from Yale which put the S&P real annual rate of rerun since inception in 1927 at 6.5%. They also went on to say that they estimate most stocks will only yield between 3-5% for the near future. I’m using between 5 and 6% for my calculators and NOT planning on a social security benefit which puts my overall saving target at about 2.2M. At almost 30, I’d like to be farther ahead than I am, but oh well. I do still have time and the market is experiencing a modest recovery so I’m not panicking yet.

  3. Aram Durphy says:

    Excellent post. An 8%, post-inflation, rate of return is what I use when people want to invest in an ETF. Of course, one can do better if one finds a manager with a track record for beating the market.

  4. Ross says:

    Wow, this is really helpful. In my future models I’ve always assumed 5% inflation adjusted returns, but it was more of just a guess. Its really useful to have 3 30 year periods with actual inflation adjusted averages. Financial Independence may be closer than I thought… thanks!

  5. Watson says:

    Agree, it is always a good idea to take the conservative estimate. I will even run the numbers as low as 5% on occasion. Would much rather end up with excess funds and go on a few extra trips after retirement than be struggling to make my budget.

    You should also check your numbers against a rise in inflation for long periods. In my opinion inflation will be on the rise in the next 3-5 years.


  6. Long says:

    I agree with using a conservative rate of return. I’d rather prepare for the worst and be pleasantly surprised with anything extra. However, I find that it’s useful to run the numbers at different rates to project what annual incomes ranges I could end up with in retirement.

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