What Rate of Return Should I Expect in Retirement?

If you have a high tolerance for risk, you may aim for over ten percent returns. However, most retired individuals seek a more balanced approach with lower risk, focusing on guaranteed returns such as three percent to keep up with inflation. Personally, I aim for six to eight percent, but I can manage with as little as five percent.

Venue and Risk Factors

The venue you choose to invest your money can make a significant difference. For those preferring lower risk, government-backed securities offer a safer but lower return. For those willing to take on greater risks, sector-specific investments such as stocks in companies like IBM and Verizon can yield 2 to 3 times the returns of guaranteed securities.

Currently, certificates of deposit (CDs) offer virtually no return but provide a safer investment option. In the current economic climate, determining a reasonable rate of return can be challenging.

Planning for Retirement

Several factors influence the rate of return you need in retirement, including your current savings, tax obligations, income streams, and investment strategies. It's crucial to consider your financial capacity to bear market corrections and assess your situation against potential risks. For example, if you start withdrawing income from your investments during a market downturn, or if you pass away and your spouse needs financial support, these factors must be taken into account.

Many individuals and advisors often overlook future income needs, healthcare expenses, and one-time large expenses. Common mistakes include not setting aside sufficient funds for healthcare and emergencies, which can lead to dipping into retirement accounts for non-emergencies. Avoid the temptation of investing in platforms like Apple, Amazon, Google, or FB without a strategic plan.

Determining Your Net Rate of Return

To accurately determine your expected rate of return, several factors must be considered:

Your current savings. Your tax obligations. Your income streams. How your current investments are performing. Your maximum downside tolerance, or the extent to which your financial situation can sustain potential losses. Your sequence of distributions and returns over time. Any potential for market corrections during your withdrawal from investments. Support needs for your surviving spouse if applicable. Income loss that your spouse may experience after you pass away.

Conclusion

Calculating the right rate of return for your retirement is a meticulous process. It involves understanding your financial goals, risk tolerance, and the impact of various economic factors. By carefully planning and considering these variables, you can ensure a more secure and comfortable retirement.