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What Is a Reasonable Rate of Return for Retirement Investing?

Saving for retirement means you can stop working because your money “works for you” when you make the right investments — or so the logic goes. But how much can you really expect to make on your retirement investing?

What you earn from what you put in is referred to as your rate of return (ROR). Many people benchmark the effectiveness of retirement savings plans based on the ROR, and they want to know what a “good” ROR is.

The answer may vary, depending on your retirement needs, your age and your investment portfolio. Let’s consider what a reasonable rate of return might look like.

Do Retirement Savings Need an Annual Rate of Return of 12%?

You may have seen an annual rate of 12% quoted as a reasonable goal to aim for. Finance gurus Suze Orman and Dave Ramsey have cited this number, and since many people who don’t know a lot about money listen to them, that 12% benchmark has become widespread.

But that is unrealistic. Their calculations don’t take inflation into account, and as everyone knows, inflation has hit record highs over the past few years. They also ignore the volatility of the markets, which can swing up and down depending on political events.

Orman partially bases her rate on compounding. She notes an assumption that someone opens their retirement account, like a Roth IRA, when they’re in their 20s. That money gains compound interest over time, and it can contribute to a more favorable overall rate.

The 12% figure has also been cited related to historical data. Historical returns from the past 100 years based on SBBI (stocks, bonds, bills and inflation) is, indeed, 12%. But financial analysts say taking a long-term average like that isn’t accurate, as it doesn’t account for fluctuations and historical changes.

A More Realistic Annual Rate of Return for Retirement Investments

You can actually grow quite a comfortable nest egg with a 5%-7% annual rate of return. Those who prefer less risk or who are closer to retirement can assume a 5% return for a balanced portfolio that includes bonds and stocks.

Investors decades away from retirement or more open to risk may tilt their investments more toward the stock market, which can pay higher dividends during a bull market, such as in recent months. Then your ROR could be as high as 7% — though financial experts caution you may need to rebalance once the inevitable bear market emerges.

Make the Right Choice for Your Retirement

Ultimately, the right rate of return is a personal choice. Some people are quite content with a lower ROR as long as it means lower risk and not needing to worry about the future so soon. Others want to put their money to work to get the bigger gains.

Have questions about what sort of rate of return you should look for on your retirement investments? Reach out to Jay today. He can answer your questions and introduce you to a product that is offering a guarantee of 5.6% for 10 years.


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