Some experts say you can get a 12-percent return on your mutual fund investments. But, in an article titled “Is the 7 Percent Return for Stocks Extinct?”, U.S. News & World Reportwriter Chris Gay states, “Since 1926, the S&P 500 has produced an annualized total return (including capital gains and reinvested dividends) of 6.6 percent, after inflation."
I take a slightly different viewpoint. Since the Great Depression, big events have happened to shape the U.S. economy. From 1941-1945, we fought World War II. From 1966 through 1981, the Vietnam War, rising inflation and a couple of oil crises saw stock market returns behave sluggishly. The dot-com era saw stocks take off, and the 2008 financial crisis shocked the market. And big events will likely happen during the next 60 years.
But some events have hugely influenced the stock markets. For example, the increasing prevalence of 401(k) plans and the reduced number of defined benefit pension plans. These examples are the clearest signs anywhere that average Americans must save more for their personal retirement.
Here’s another factor to consider when looking at the rate of return for retirement planning: During the last 30 years, the Treasury Bond Yield has steadily declined. According to Crestmont Research, the yield in 1983 was around 10 percent and in 2012 it was near zero. The yield curve is a benchmark for debt such as mortgage rates and bank lending rates.
So, with this data as context, the shorter answer to the question is: Plan for a six- to nine-percent rate of return. If I’m wrong, you’ll have more money than you will need in retirement. If I’m right, you may be one of the few people who have enough money to retire the way many people only dream of.
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