{"id":4984,"date":"2017-07-10T05:00:44","date_gmt":"2017-07-10T12:00:44","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=4984"},"modified":"2017-10-11T15:21:49","modified_gmt":"2017-10-11T22:21:49","slug":"average-retirement-savings-return","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/average-retirement-savings-return\/","title":{"rendered":"The Average Retirement Savings Return"},"content":{"rendered":"

\"Picture<\/a>Buried at the heart of every personal financial plan is a critical percentage: an average retirement savings return estimate.<\/p>\n

And that leads to problem, frankly. That average retirement savings return is surely wrong for one or more reasons.<\/p>\n

In this short blog post, therefore, let me identify the four most common errors we all (me included) easily make.<\/p>\n

Average Retirement Savings Return Error #1: Nominal Return<\/h2>\n

A first quick error common to new investors: Using a nominal return\u2014which is a return that hasn\u2019t been adjusted for inflation.<\/p>\n

What you and I want to do is use a real return\u2014which is a return that has inflation subtracted out.<\/p>\n

Example:<\/strong> One you start looking for investment return percentages to use in your own planning, you\u2019ll stumble on the historical stock market return of 9% to 10%. But that\u2019s a nominal return. Some of that 9% or 10% only represents inflation. (Probably about 3%?)<\/p>\n

To adjust the 9% or 10% nominal return for the 3% inflation, you subtract the 3% from the 9% or 10%.<\/p>\n

By the way, when you work with real return percentages in your calculations, the future savings and retirement income amounts you calculate use current-day dollar amounts\u2014not inflated dollar amounts. That’s good\u2026<\/p>\n

Average Retirement Savings Return Error #2: Gross Return<\/h2>\n

Another easy error to make: Using the gross return rather than the net-of-expenses return.<\/p>\n

But you and I need to adjust the return we expect for the expenses we pay to financial advisers and mutual fund companies.<\/p>\n

If our retirement savings generate a gross 6% real return, for example, but we pay 1% to an investment adviser, we actually only earn 5%. So that 5% is the number we need to use in our calculations.<\/p>\n

Note:<\/strong> If you\u2019re paying more than half a percent (more than .5%) in investment fees, check out the popular Bogleheads.org<\/a> forum for strategies and tactics about how to grind down your annual investment costs.<\/p>\n

Average Retirement Savings Return Error #3: Single Percentages<\/h2>\n

And now an error that even many experienced do-it-yourself-ers make: We want to avoid using a single percentage value for your estimates.<\/p>\n

In other words, you might be tempted to use a 6% average retirement savings return for your retirement calculations. That would seem to make sense since over the last 150 years or so, the stock market\u2019s average, median annual return has run about 6%.<\/p>\n

But here\u2019s the problem. A 6% median annual return doesn\u2019t mean you\u2019ll earn 6%. It tells you there\u2019s a 50% chance you\u2019ll earn more than 6% and a 50% chance you\u2019ll earn less. Almost surely, you’ll experience some percentage very different from that median.<\/p>\n

The little table below gives more details using the example where someone annually saved $5,500 for retirement over 35 years and invested 75% of their savings in stocks and 25% in bonds sometime in the last roughly 150 years:<\/p>\n\n\n\n\n\n\n\n\n
Outcome<\/th>\nFuture Savings<\/th>\nAnnual Avg. Return<\/th>\n<\/tr>\n
Worst<\/td>\n$231,314<\/td>\n1.05%<\/td>\n<\/tr>\n
20th<\/sup> Percentile<\/td>\n$437,551<\/td>\n4.38%<\/td>\n<\/tr>\n
Median<\/td>\n$620,358<\/td>\n5.99%<\/td>\n<\/tr>\n
80th<\/sup> Percentile<\/td>\n$800,482<\/td>\n7.24%<\/td>\n<\/tr>\n
Best<\/td>\n$1,007,843<\/td>\n8.28%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Make sure you understand the numbers in the preceding table\u2014because too few people do.<\/p>\n

The numbers show that the median outcome equals $620,358 an amount that reflects the median 5.99% return.<\/p>\n

But in truth, wide variability occurs:<\/p>\n