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How Much Can I Expect To Earn On My Retirement Savings?

How much can I expect to earn on my retirement savings?

The Treasury Secretary explains MyRA: A ‘starter’ retirement account

My nest egg is invested in a relatively simple portfolio of stock and bond index funds. What’s a reasonable rate of return for me to expect in the future? –Paul

You ask an important question. Clearly, the returns you earn will affect such issues as how much you need to save each year to build a nest egg large enough to support you in retirement and how much you can reasonably expect to draw from savings year to year during retirement without depleting your stash prematurely. So you want your planning to be based on return assumptions that are realistic.

Unfortunately, it appears that many people’s expectations may be a bit too, shall we say, exuberant. When asset manager Black Rock queried more than 1,000 401(k) investors for its latest DC Pulse Survey, 66% expected returns on their savings over the next decade to be in line with what they’ve experienced in the past, while another 17% believed returns will be even higher.

Maybe that optimism stems from the fact that stocks have returned close to an annualized 18% over the past eight years or so. Or perhaps it’s because the stock market has had a nice bump since the election of Donald Trump.

But given today’s low interest rates (recently about 2.3% for 10-year Treasuries) and relatively rich stock valuations (Yale finance professor Robert Shiller’s cyclically adjusted P/E ratio for the stock market recently stood at 29.2 vs. an average of 16.7 since 1900), it would seem to strain credulity to expect anything close to the annualized returns of 10% for stocks and 5% for bonds over the past 90 years or so, let alone the dizzying gains the market has generated from its post-financial crisis lows.

So what level of future returns might be considered reasonable? Well, one way to get an idea is to take a look at what large investment firms are anticipating. For example, every quarter BlackRock publishes capital market assumptions about a wide range of asset classes. In its most recent forecast, BlackRock expects long-term (10 years plus) annualized gains of 5.9% for U.S. and 3.1% for U.S. bonds. Vanguard also recently published a 2017 economic and market outlook in which the fund giant had a median forecast for the next 10 years of 6.6% for stocks and 3.1% for bonds.

Neither I nor anyone else can guarantee that these forecasts — or a similar 2017 long-term outlook by J.P. Morgan that expects slightly different, although comparable, returns — will turn out to be right on the money. In fact, I’d be surprised if they were. There are just too many variables and uncertainties involved in predicting how the financial markets will perform to expect anything close to pinpoint accuracy.

All in all, however, these returns seem, to me at least, to be in the ballpark. You can quibble about whether they could be a bit…

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