What Is a Realistic Rate of Return for Retirement?

Everyone loves seeing growth in their portfolio. However, a good year of investing doesn’t necessarily indicate a sound long-term investment strategy. Generating sufficient retirement income means planning ahead of time but being able to adapt to evolving circumstances. As a result, keeping a realistic rate of return in mind can help you aim for a defined target. Many consider a conservative rate of return in retirement 10% or less because of historical returns. Here’s what you need to know.

Need help planning for retirement? A financial advisor can help you manage your portfolio, figure out how much income you’ll need and assist in other important decisions. 

What Is a Realistic Rate of Return for Retirement?

Understanding a realistic rate of return will help you create an accurate retirement plan. However, doing so requires diving deeper than the nominal rate of return, which reflects your investment growth before accounting for administration fees, taxes and inflation.

Focusing on the nominal rate of return can give you a false sense of security. While your investments may grow according to that rate, it doesn’t account for the actual income you’ll have available. Instead, the real rate of return will help you understand how much money you’ll actually have in your pocket in retirement.

For example, say you invest in a fund that historically provides an 8% nominal rate of return. However, the fund has a 0.5% management fee, and inflation is 3%. Therefore, you subtract 3.5% of the return before it hits your wallet. This means your holdings are generating a 4.5% return. So, if you invest $100,000, you’d see a real return of $4,500 due to fees and inflation.

Then, if your retirement account isn’t a Roth account, you’ll also pay income taxes. Depending on your tax bracket, you could pay between 0% and 37% in federal income taxes. As a result, the 8% rate of return is a surface-level indicator of the investment’s performance. In an environment with high inflation and taxes, your real return could be next to nothing.

That said, investments can still be an excellent source of retirement income. For example, the stock market has provided about a 10% return over the last 50 years, as seen specifically with the S&P 500. Adjusted for an average inflation rate of 3%, that’s a 7% return before administration fees (which you can keep low by finding an inexpensive investment firm) and taxes (which vary from person to person).

Factors That Determine Your Rate of Return in Retirement

Your rate of return is also subject to factors beyond taxes, fees, and inflation. They vary due to individual circumstances and preferences. These are the key factors to pay mind to:

1. Risk Tolerance

High returns come with high risk when investing. As a result, younger investors tend to have more risk capacity and a higher risk tolerance because they can make up for early losses over time. However, your risk tolerance usually drops as you age and enter retirement. After all, seeing your $1.5 million portfolio drop 20% a week before retirement can raise concerns about whether your nest egg will be sufficient.

Therefore, it’s crucial to note the stage of life you’re in and how much risk you can handle. For example, a conservative investor may want to allocate more of their portfolio to bonds, even if they have decades before retirement.

2. Investment Types

Likewise, your investment types will affect your returns. For instance, you might choose two or three of the following assets to create your nest egg:

• Stocks
• Bonds
• Mutual funds
• Exchange-traded funds (ETFs)
• Real Estate Investment Trusts (REITs)
• Index funds
• Precious metals
• Annuities
• Life insurance
• Certificates of deposit (CDs)

Each of these investments comes with its particular rate of return, fees, and unique features. For example, life insurance provides a payout to your beneficiaries upon your death, while certificates of deposit last up to five years before you need to renew them. Therefore, your choice of asset type will influence your income streams and the income level you’ll expect in retirement.

3. Retirement Timeline

When you retire also impacts your portfolio’s rate of return. For instance, those who retired in 2022 likely did so when their portfolios were suffering (the S&P 500 fell by approximately 19%). However, those with plans to retire in the coming years will have a chance for their investments to recover before relying on them for investment income. Therefore, when you retire can determine your investment’s success as much as your asset selection.

Because investment performance and retirement timing often work hand in hand, you may want to use SmartAsset’s retirement calculator to estimate how changes to your retirement date could impact savings growth and future income.

4. Fluctuating Returns

On that note, realizing that even historically reliable indexes like the S&P 500 have fluctuating returns is essential. In other words, a stock blend with a 15% return last year might take a 10% dive this year.

While this dynamic complicates retirement planning, it’s best to look at an asset’s return over time to understand how it may benefit your portfolio. This way, you’ll get an idea of how it performs over the long haul. Just keep in mind that past performance doesn’t guarantee future results.

5. Annualized vs. Compounding Returns

Whether your returns compound or not puts another wrinkle in retirement planning. Specifically, compounding returns means reinvesting your earnings. A savings account works the same way. Your bank provides an interest payment each month, which combines with your principal and earns more interest in the future.

That said, your retirement account will provide compounding returns until you retire and begin withdrawing money. In other words, if your nest egg grew at a rate of 7% over your career and reached $1 million, it likely did so by compounding your returns.

However, if you’ll use that $70,000 to live on during retirement instead of reinvesting it, that money won’t compound. As a result, differentiate between annualized and compounding returns when you need income from your portfolio. Otherwise, you’ll get a false sense of how healthy your portfolio will be 10 years into retirement.

Historic Rates of Return for Different Asset Classes

As mentioned previously, returns vary over time. Therefore, it’s helpful to review how they have performed through the past decades. For example, stocks are profitable but volatile. The S&P 500 returned 37.2% in 1995 and 37.39% in 2013, but it dipped to -37 in 2008 and -19.64% in 2022. However, the market surged with a 25% total return in 2024.

Fidelity Investments provides a report of annualized returns for portfolios of the conservative, balanced, growth, and aggressive growth varieties if you invested from 1926 through 2025. ¹ Here are the numbers:

Conservative: 50% bonds, 30% short-term investments, 14% U.S. Stock, and 6% foreign stock.

• Average annual return: 5.78%
• Worst 12-month return: -17.67%
• Best 12-month return: 31.06%
• Worst 20-year return: 2.92%
• Best 20-year return: 10.98%

Balanced: 40% bonds, 35% U.S. stock, 15% foreign stock, 10% short-term investments.

• Average annual return: 7.83%
• Worst 12-month return: -40.64%
• Best 12-month return: 76.57%
• Worst 20-year return: 3.43%
• Best 20-year return: 13.84%

Growth: 49% U.S. Stock, 25% bonds, 21% foreign stock, 5% short-term investments.

• Average annual return: 8.89%
• Worst 12-month return: -52.92%
• Best 12-month return: 109.55%
• Worst 20-year return: 3.1%
• Best 20-year return: 15.34%

Aggressive Growth: 60% U.S. stock, 25% foreign stock, 15% bonds.

• Average annual return: 9.62%.
• Worst 12-month return: -60.78%
• Best 12-month return: 136.07%
• Worst 20-year return: 2.66%
• Best 20-year return: 16.49%

How to Determine Rates of Return for Retirement Projections

All these numbers may leave you with the question of how to project future rates of return for your retirement account. Fortunately, several techniques can help you get accurate figures.

Understand Your Asset Class

The assets you invest in will determine your rate of return. For instance, if you want high returns and can tolerate risk, steer clear of bonds. Sure, they’ll sit and provide a modest return, but they won’t fit your preferences (stocks would be a better fit). So, it’s a good idea to have basic knowledge of the various asset classes before sinking money into an investment.

Adjust to the Circumstances

A 25-year-old will likely invest in a growth fund with plenty of stocks. This move makes sense because they can take advantage of higher gains while having plenty of time to overcome losses.

However, when that same person is 10 years away from retirement, it may be time to shift a portion of their portfolio away from stocks and into low-risk, low-reward assets, like bonds. In other words, at each stage of life, it’s wise to ask yourself what your goals are and how your investments are helping you get there. Then, you can make suitable changes.

Plan for Multiple Scenarios

There is no guarantee of future investment gains, so it’s best to run your nest egg through multiple calculations to see where you’d land in different circumstances. Anticipating various scenarios can allow you to plan for different outcomes, reducing stress and increasing your quality of life.

For example, how much retirement income would you receive if your assets performed exactly as predicted? On the other hand, if your assets only performed as well as their lowest return in the last decade, how much would that change your income? The answers to these questions will help you respond effectively if your investment fund underperforms.

How to Maximize Your Rate of Return in Retirement

Maximizing your real rate of return can help you maintain a robust income. Use these tips to keep your cash flow healthy in a volatile market:

• Fight Inflation: While inflation impacts working and retired Americans alike, you can combat its effects to make your dollar stretch further. First, you can relocate when you retire to a more affordable place to live. Additionally, your asset class can protect against inflation. For instance, stocks can be effective inflation hedges because corporate profits usually rise during bouts of inflation. Specifically, value stocks (as opposed to dividend stocks or growth stocks) are excellent for insulating you against inflation.

• Buy Inflation-Linked Bonds: A specific bond type can take advantage of inflation. Treasury Inflation-Protected Securities (TIPS) increase their par value when inflation increases. For example, a $1,000 TIPS with a 0.5% interest rate provides a $5 return before inflation. However, if inflation rises 5% for the year, your asset gains $50 more in value. Therefore, TIPS are low-risk assets with a niche role in inflationary settings.

• Prioritize short-term bonds: Likewise, bonds also help with inflation because they offer varying timelines before you sell them. Bond interest rates rise with inflation, and short-term bonds respond quickly to market dynamics. So, you can purchase these assets and sell them after a maturity period of one to five years.

• Diversify your portfolio: Diversification is a key strategy for all investors to follow. Whether you’re dealing with a bull market, extreme inflation or impending retirement, spreading your investments among numerous asset classes will decrease your risk and provide exposure to different industries.

• Keep moderate cash reserves: Although stuffing all your hard-earned money under your mattress is a simpler approach, it won’t sustain you during retirement. Inflation constantly devalues currency, meaning the $100 in your wallet will probably be worth about $98 or $97 the next year during periods of normal inflation.

You may want to talk to a financial advisor to get help in determining how you can maximize your portfolio’s rate of return.

How a Financial Advisor May Help You Maximize Your Rate of Return

A realistic rate of return does not come from picking the right investment. It comes from coordinating asset allocation, fees, taxes and inflation into a strategy that holds up across decades and market cycles. Here is where professional guidance makes the most difference.

Calculate Your Real Rate of Return

Most investors focus on the headline return their portfolio generates without accounting for the factors that erode it. The number that matters is what actually reaches your pocket after fees, inflation and taxes are applied.

• What an Advisor Does: An advisor calculates your real rate of return by layering in your actual expense ratios, your marginal tax rate and current inflation to show what your portfolio is genuinely producing. This prevents the common mistake of planning retirement income around a nominal return that significantly overstates what you will actually have to spend.
• Example: A retiree holds a mutual fund with an 8% nominal return, a 0.75% expense ratio and faces a 22% federal tax rate in a 3% inflation environment. The advisor walks through the math: 8% minus 0.75% in fees minus 3% inflation leaves 4.25% before taxes. After applying the 22% rate to that gain, the real after-tax return drops to approximately 3.3%. The retiree had been planning on 8%. The advisor rebuilds the retirement income projection around the accurate number before the gap becomes a crisis.

Line Up Asset Allocation With a Retirement Timeline

The right portfolio at 40 is the wrong portfolio at 60. Sequence of returns risk means that a major market drop in the first few years of retirement can permanently damage a portfolio that would have recovered fine during accumulation.

• What an Advisor Does: An advisor shifts your allocation progressively as retirement approaches, moving from growth-oriented assets toward a mix that balances continued growth with downside protection. That shift is not a one-time event but an ongoing process calibrated to your specific retirement date, income needs and risk tolerance.
• Example: A 58-year-old with 80% of her portfolio in equities plans to retire at 63. An advisor models what a 2008-style market drop would do to her portfolio in year one of retirement versus year five. The analysis shows that rebalancing to 55% equities and 45% bonds and short-term instruments over the next four years reduces the worst-case scenario from a 40% portfolio loss to roughly 22%, preserving enough capital to sustain 30 years of withdrawals even in a bad sequence.

Minimize Fees Across the Portfolio

Investment fees are one of the few retirement costs entirely within your control. A difference of 0.5% in annual fees compounded over 20 years can consume a significant portion of a retirement portfolio.

• What an Advisor Does: An advisor audits your current holdings for expense ratios, fund overlap and unnecessary complexity, then replaces high-cost funds with lower-cost alternatives that maintain the same exposure. Fee savings compound the same way investment returns do, and an advisor can quantify exactly what the current cost structure is taking out of your retirement over time.
• Example: A retiree holds five actively managed mutual funds averaging a 1.2% expense ratio across a $600,000 portfolio. An advisor replaces them with a combination of low-cost index funds averaging 0.08% in fees. The annual savings of roughly $6,720 per year, reinvested at a 6% return over 20 years, compounds to more than $247,000 in additional retirement assets. The portfolio performance is nearly identical. The cost structure is not.

Plan for Multiple Return Scenarios

No projection of future returns is guaranteed. A retirement plan built around a single assumed rate of return is fragile. One that accounts for multiple outcomes is not.

• What an Advisor Does: An advisor stress-tests your retirement plan against best-case, base-case and worst-case return scenarios, showing you what your income looks like if the market performs as expected, significantly underperforms and partially recovers. This allows you to make informed decisions about spending, withdrawal rates and contingency strategies before a difficult market forces your hand.
• Example: A couple plans to retire in three years with $900,000 saved and expects a 7% annual return. An advisor runs three scenarios: 7% as projected, 4% reflecting a prolonged low-return environment and a sequence where the portfolio drops 30% in year two before recovering. At 7%, the portfolio sustains 30 years of withdrawals comfortably. At 4%, it runs short by year 24. After the early drop scenario, it runs short by year 19. The advisor adjusts the withdrawal rate from 5% to 4.2% and shifts the bond allocation to reduce the early-drop risk, keeping all three scenarios above the waterline.

Bottom Line

A realistic rate of return for retirement depends on your asset allocation, investment management fees, inflation and taxes. Calculating your real rate of return means accounting for these factors when assessing your investment gains. While inflation reduces returns, you can adopt several strategies, like investing in stocks and inflation-linked bonds, to overcome this obstacle. Remember, diversifying your portfolio and maintaining discipline during market volatility often leads to better outcomes.

“The rate of return you can expect in retirement depends on your own comfort level and how you allocate your investments. Rather than aiming for a specific rate, make sure your retirement plan accounts for varying rates over time,” said Brandon Renfro, CFP®.

Brandon Renfro, CFP®, RICP, EA provided the quote used in this article. Please note that Brandon is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Portfolio Management Tips

• Managing investments yourself can be a lot to juggle when you’re sifting between stocks and bonds, and aren’t sure how much income you’ll need. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Diversifying your investments means more than blending stocks and bonds in your portfolio. Here is a guide to 10 investment types and how they work.

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