Projecting the amount of investing the capital need in retirement to produce a specific level of income is an easy process.  At its simplest, all an investor needs to do is determine their income requirements. Then determine what portfolio size they need to generate that income assuming a three to four percent withdrawal rate.

However, what is and will always be more difficult is determining what annual growth rate investors should assume the will receive as they build up their portfolio.  This will dictate how much money they invest each and every month in order to obtain that retirement income goal.  In case, it is assumed that a higher growth rate will be achieved, then less money will need to be invested.  With a lower growth rate, more money will obviously need to put into the investment account.

In order to identify which number to use, or a range of growth rates to use. We can look at research completed by Credit Suisse in the 2016 Global Investment Yearbook.

Average Annualized Returns in the U.S.

Credit Suisse has a comprehensive look back to how the U.S. stock market has performed going all the way back to 1900.  This extensive and well-documented history is a tool investors can use to get a sense of what type of return projections to use when retirement planning.

Using this type of data is also a good proxy in comparison to what banks and other financial institutions want you to believe you can achieve if you invest using their funds.  Since the U.S. market has seen some huge gains in the past few years. You will often see money managers project that investors will be able to earn eight to eleven percent per year.  However, when reviewing the history going back to 1900 it is clear to see that those rates are not the norm.

Based on the research conducted by Credit Suisse, a more realistic annualized return from the U.S. stock market is 6.4%.  That is a far cry from 11%.  While planning for a specific retirement income, if you assumed an 11% return but only achieved 6% then your portfolio will definitely not meet your goals.

Here is a snapshot of the returns from equities, bonds, and treasuries for a few different periods.  Note the 2000 – 2015 return of only 2.3%.

What Rate Projection Should You Use?

Using the above data as a guide, it is clear that for various periods in the U.S. stock market investors have seen returns from 2.3% all the way up to 6.4%.  That assumes that as an investor you are investing 100% in equities.

However, since most portfolios are made up of equities, bonds, and T-bills. We need to make sure that those lower returns are taken into account.  With returns anywhere from -0.4% to 5.4% it is important that the gains are further tempered.  As a result, it is a good idea to err on the side of caution and go with a lower expected return, and invest as much money as you can as you build up your investment portfolio.

With that in mind, an expected return of anywhere from 2% to 5% is probably safe to assume.  Low enough to make sure you save as much as possible. However, close to the average returns based on historical returns.


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