What Return Should You Expect?

Every compound interest calculation needs a rate. Pick one too high and the plan falls apart.

Here is what history says.

US stocks

The S&P 500 has returned about 10% a year on average since 1926, with dividends reinvested. After inflation that is closer to 7%.

The average hides huge swings. Single years have ranged from about -37% to +54%.

US government and high quality corporate bonds have returned around 5% a year over the long run. After inflation it is 1% to 2%.

Bonds smooth the ride. They do not do much of the compounding.

Savings accounts and money market funds roughly track inflation over time. Sometimes a little above, often a little below.

Cash is for emergencies and near term goals, not for growth.

A 60/40 stock and bond mix has historically returned around 8% before inflation. A 100% stock portfolio around 10%.

Fees come off the top. Subtract your expense ratio from any figure you use.

For long term stock heavy portfolios, 6% to 7% is a sensible planning number. It leaves room for lower future returns.

For savings accounts, use the APY you are actually getting. For inflation, use 3%.

Then test the plan at 5%. If it still works, you are on solid ground.