What Returns Should You Actually Expect From Your Retirement Investments?

Young savers often wrestle with a planning dilemma: Should they assume aggressive 10% annual returns and be optimistic about retirement, or conservative 5% returns and stay safe? The answer requires understanding what historical data actually shows, the difference between nominal and real (inflation-adjusted) returns, and the trade-off between risk and reward. Using 6–7% real returns is prudent; using 10% nominal returns is not.

Quick definition: Expected investment returns are the average annual percentage gains (or losses) that a diversified portfolio generates over the long term. Returns can be nominal (before inflation adjustment) or real (after inflation adjustment). Historical returns vary by asset class, time period, and portfolio allocation, but long-term diversified portfolios have averaged 6–8% nominally or 3–5% in real terms.

Key takeaways

• Diversified stock-bond portfolios have historically returned approximately 7–8% per year nominally (before inflation) or 4–5% in real terms (after inflation) over 20+ year periods
• Stock portfolios alone have returned approximately 9–10% nominally, but with 20–40% downside swings in bad years; bonds have returned 4–5% nominally with much lower volatility
• Using 6–7% nominal (or 3–4% real) in retirement planning is conservative and leaves a safety margin; using 10%+ is optimistic and risks undersaving
• Inflation averages 2–3% annually, so 7% nominal returns minus 2.5% inflation yields 4.5% real growth—the growth that actually matters for purchasing power
• Expected returns matter less for young savers (who have decades to recover from volatility) and more for retirees (who cannot afford to outlive their portfolio)

Historical Returns by Asset Class

U.S. stocks: From 1926 to 2025 (100 years of data), U.S. equities have returned approximately 10% per year nominally and 6.5–7% in real terms. However, the typical range in any single year is from -40% to +50%. Bad stretches (like 2000–2002 or 2008–2009) saw cumulative losses exceeding 50%. Good years (like 2003–2007 or 2017–2021) saw returns exceeding 20%. Over 20-year periods, stocks almost always beat inflation substantially, but over 1–5 year periods, they are volatile and unpredictable.

U.S. bonds: Bonds have returned approximately 4–5% per year nominally and 1–3% in real terms. They have been more stable than stocks, with annual swings typically in the -10% to +10% range (except in extreme interest-rate environments). Bonds lose value when interest rates rise, but their lower volatility makes them attractive for risk-averse investors and retirees.

Diversified portfolios: A balanced portfolio mixing stocks and bonds (typical allocations are 50/50, 60/40, or 70/30 stocks/bonds) has historically returned 6–8% nominally and 3–5% in real terms, with volatility between stocks and bonds alone. A 60/40 portfolio might experience -20% in a bad year and +20% in a good year—less extreme than stocks but more volatile than bonds.

International stocks and real estate: These have tracked similarly to U.S. stocks over long periods, though with different volatility patterns and currency exposure.

As of the mid-2020s, yields on bonds are elevated (roughly 4–5% on intermediate-term Treasuries), which may lead some to expect higher total returns. However, bond returns also depend on interest rates and inflation expectations, making predictions uncertain.

Nominal Versus Real Returns

A critical distinction is nominal returns (before inflation) and real returns (after inflation's effects).

If your diversified portfolio returns 7% nominally and inflation is 2.5%, your real (inflation-adjusted) return is approximately 4.3%. Here is the formula:

Real Return = (1 + Nominal) / (1 + Inflation) - 1
Real Return = (1.07) / (1.025) - 1 ≈ 0.043 or 4.3%

This matters enormously for retirement planning. Your portfolio might show $1.88 million at age 65 based on 7% nominal returns, but the purchasing power (what you can actually spend) is determined by real returns. At 2.5% average inflation, that $1.88 million has the purchasing power of roughly $900,000 in today's dollars.

Many young savers hear "historical returns are 7–10%" and assume they can spend real money at that rate. In practice, they can spend at 4–5% real rates. Using real return assumptions (3–4%) in planning is more conservative and safer.

The Impact on Retirement Planning

Using different return assumptions dramatically changes your projected retirement balance.

A 22-year-old contributing $5,000 annually for 43 years:

• At 5% nominal returns (2.5% real): Final balance $720,000 nominal, or $350,000 in today's purchasing power
• At 7% nominal returns (4.5% real): Final balance $1.88 million nominal, or $900,000 in today's purchasing power
• At 9% nominal returns (6.5% real): Final balance $4.2 million nominal, or $2.0 million in today's purchasing power

The difference between conservative (5%) and optimistic (9%) assumptions is a factor of 5–6 in final wealth. This is why return assumptions are load-bearing: they change your entire retirement plan.

Most financial planners and academic research recommend using 6–7% nominal (3–4% real) for planning purposes. This sits between the historical long-term average and the conservative extreme. It provides a safety margin without being so pessimistic that you oversave.

Why Higher Returns Are Risky to Assume

Some savers look at 100% stock portfolios' 9–10% historical returns and think, "Why not assume 9% for my planning?" The answer: volatility and sequence of returns risk.

A saver who assumes 9% returns and ends up with 5% due to market conditions or poor portfolio allocation has undersaved relative to their retirement goal. They face a shortfall. The planning mistake is even worse if the low returns happen late in the accumulation phase or early in retirement (sequence of returns risk).

Consider two scenarios:

• Good luck: Years 1–20 return 10%/year, years 21–40 return 8%, years 41–43 return 6%. Average: 8.1% real over 43 years.
• Bad luck: Years 1–20 return 4%/year, years 21–40 return 8%, years 41–43 return 10%. Average: same 8.1% real.

If you plan assuming 9% and get scenario "Good luck," you exceed your goal and retire comfortably. If you get scenario "Bad luck," your early-career returns are weak (just as you start), you build a small foundation, and later returns cannot compensate. Your final balance is 20–30% lower.

This is why conservative planning (assuming 6–7%) is safer: you are more likely to hit your goal even in suboptimal scenarios.

Real-world market cycles

Real-world examples

The conservative planner: David is 25, earns $75,000, and commits to 10% retirement savings ($7,500/year) through age 65 (40 years). He assumes 6% real returns in his planning (equivalent to ~8.5% nominal with 2.5% inflation). His projected balance: approximately $1.4 million in nominal dollars, or $700,000 in today's purchasing power.

At age 65, markets have returned 8% nominally (above his assumption). His actual balance is $2.1 million. He has exceeded his goal, has flexibility in retirement, and can retire comfortably.

The optimistic planner: Lisa is also 25, earns $75,000, and commits to 10% retirement savings ($7,500/year) through age 65. She assumes 10% nominal returns (7% real). Her projected balance: $4.2 million in nominal dollars.

At age 65, markets have returned 6% nominally (below her assumption, as often happens during the planning horizon). Her actual balance is $1.8 million. She expected $4.2 million and got half that. She must work longer or reduce her retirement spending by 50%—a painful reckoning.

The historical-average tracker: Marcus uses 7% nominal returns to plan. He contributes $5,000/year from age 22 to 65 and projects $1.88 million. His 40-year actual experience includes several market cycles:

• 2000–2002 (tech crash): returns average 2%/year
• 2003–2007 (recovery): returns average 15%/year
• 2008–2009 (financial crisis): returns average -15%/year
• 2010–2020 (recovery and growth): returns average 14%/year
• 2021–2025: returns average 10%/year

The weighted average across his 43-year career: approximately 7.3%/year. His actual balance at 65 is $1.95 million—almost exactly his projection. By using a historical average assumption, Marcus's planning proved robust.

Common mistakes

Using peak-year returns for planning. Some savers see a year when stocks return 30% or bonds return 5% and assume that as normal. Historical averages smooth out one-off high years. Using a strong single year's return for 40-year planning guarantees undersaving.

Confusing nominal and real returns. A saver who reads "7% stock returns" and assumes their purchasing power grows 7%/year is making an error. If inflation is 3%, real purchasing power grows only 4%. Mixing nominal and real assumptions is a common planning mistake.

Assuming high returns to compensate for late starting. A delayed saver might think, "I'll assume 10% returns instead of 7% to make up for lost time." This is dangerous. You cannot choose your returns; markets determine them. Assuming high returns does not make them happen—it just makes your plan fragile.

Forgetting about volatility in the early years. Young savers can tolerate volatility, but they must endure it emotionally. A 22-year-old who experiences a -30% market drop and panics, withdrawing funds, locks in losses. Using volatile but historically sound return assumptions is prudent; panicking and changing strategy is not.

Oversaving due to conservative assumptions. Some savers use very low return assumptions (3–4% nominal) and end up oversaving dramatically. While being conservative is safer, oversaving beyond a reasonable comfort level may sacrifice lifestyle during earning years. A 6–7% assumption balances safety and reasonable living.

Ignoring tax implications in returns. Nominal returns assume pre-tax earnings. After taxes and fees, your real return is lower. Using slightly lower return assumptions (6–7% instead of 8–10%) implicitly accounts for this, but being explicit helps.

FAQ

What return should I use to plan my retirement?

Use 6–7% nominal returns (or 3–4% real, after inflation). This is conservative relative to historical long-term averages (7–8% nominal) but provides a safety margin. If you hit 7–8%, you will exceed your goal. If you get 5–6%, you will roughly meet it. This is prudent.

Are real returns the same as after-inflation returns?

Yes, "real returns" means inflation-adjusted. If you earn 7% nominal and inflation is 2.5%, your real return is approximately 4.3%. Real returns are what matter for your purchasing power in retirement.

Can I assume 10% returns if I invest in stocks only?

Historically, stocks have returned 9–10% nominally, but with high volatility and drawdown risk. Many young savers cannot tolerate a -40% loss without panic-selling. A 60/40 diversified portfolio at 7% returns is often a better outcome than a 100% stock portfolio at 9% returns that you sell at losses during downturns.

What if I believe inflation will be higher in the future?

If you believe inflation will be 4% instead of 2.5%, adjust your real return expectation downward. Use 5% nominal instead of 7% to compensate. However, be cautious about making strong inflation predictions; historical averages are often right.

Does the return assumption change as I get older?

Somewhat. Young savers (20–40) can use 7% nominal because they can recover from volatility. Savers closer to retirement (55–65) might use 5–6% nominal to reduce risk and avoid sequence-of-returns damage. Retirees should use 4–5% to be conservative.

What if markets crash right before my retirement?

This is sequence-of-returns risk, and it is real. If you plan assuming 7% returns and markets drop 30% in your final working years, you are harmed. To mitigate, gradually shift to more conservative allocations (more bonds, fewer stocks) as you approach retirement. A 60/40 portfolio at age 60 and 30/70 at age 65 reduces crash impact.

How do I know if my advisor's return assumptions are reasonable?

Ask for historical justification. If they assume 8%+ returns, ask if that is based on 100% stocks or a diversified portfolio. If diversified, 8% is high—question it. If it is 100% stocks, ask if you are comfortable with 30–40% drawdowns. Reasonable advisors use 6–7% for diversified portfolios and can explain why.

Related concepts

• Compounding Across Decades
• Time in Market vs. Amount Saved
• The 22 vs. 32 Saver
• Withdrawal Strategies in Retirement
• Social Security Planning

Summary

Historical returns for diversified portfolios have averaged 7–8% nominally or 4–5% in real (inflation-adjusted) terms. Using 6–7% nominal returns for retirement planning is conservative and prudent; using 10%+ is optimistic and risks undersaving. The difference between nominal and real returns is critical: a 7% nominal return minus 2.5% inflation yields 4.3% real growth, which is what you can actually spend in retirement. Young savers should be comfortable with the volatility that comes with equity exposure (necessary to achieve 7% returns), while savers near retirement should shift toward more conservative allocations. Using historical averages as planning assumptions, rather than peak years or optimistic scenarios, provides a safety margin and increases the likelihood of meeting retirement goals.

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