Most financial planners recommend using a 5% to 7% annual return for retirement projections, depending on how aggressively your portfolio is invested. That range accounts for a mix of stocks and bonds and builds in some conservatism so you’re not blindsided if markets underperform. The specific rate you choose should reflect your actual asset allocation, your time horizon, and whether you’d rather be pleasantly surprised or dangerously optimistic.
Why the Rate You Pick Matters So Much
A small difference in your assumed return creates an enormous gap over decades. If you invest $500 a month for 30 years at 5%, you end up with roughly $418,000. At 7%, that same contribution grows to about $567,000. At 10%, it balloons to nearly $987,000. The rate you plug into a retirement calculator isn’t just a technical detail. It determines how much you think you need to save each month, when you think you can retire, and whether your plan is grounded in reality or wishful thinking.
The Range Professionals Actually Use
David Blanchett, head of retirement research at PGIM DC Solutions, recommends a 5% return assumption for a balanced portfolio of stocks and bonds, or 7% for a portfolio tilted more heavily toward stocks. Fidelity uses an even more conservative 3.5% return in its default retirement balance projections. These numbers are meant to represent what you can reasonably expect after accounting for the inevitable bad years mixed in with the good ones.
You may have heard figures as high as 12%, which is roughly what the S&P 500 has returned on average over long historical periods. Personal finance figures like Suze Orman and Dave Ramsey have cited that number. But there are two problems with using 12% for your plan. First, it reflects an all-stock portfolio, which very few people actually hold through an entire career and into retirement. Second, that figure is a nominal return, meaning it doesn’t subtract inflation. After inflation, the stock market’s long-term average drops closer to 7% to 8%.
Nominal Returns vs. Real Returns
This distinction trips up more people than almost anything else in retirement planning. A nominal return is the raw percentage your investments gain. A real return subtracts inflation, showing the growth in your actual purchasing power. If your portfolio earns 7% in a year but inflation runs at 3%, your real return is roughly 4%.
When you’re projecting how much money you’ll accumulate, you need to decide whether your future spending estimates are in today’s dollars or future dollars. If you’re thinking “I’ll need $60,000 a year in today’s purchasing power,” then you should use a real (inflation-adjusted) return in your calculations, typically in the 3% to 5% range. If you’re projecting future dollar amounts that already factor in rising costs, you can use nominal returns of 5% to 7%. Mixing these up is one of the fastest ways to build a retirement plan that looks solid on paper but falls apart in practice.
Match the Rate to Your Portfolio
Your assumed return should mirror the investments you actually own, not a theoretical portfolio you’d never hold. A portfolio split 60% stocks and 40% bonds will behave very differently from one that’s 90% stocks. Here’s a rough framework for picking your rate:
- Conservative portfolio (30% to 40% stocks): Use 4% to 5% nominal, or about 2% real.
- Balanced portfolio (50% to 60% stocks): Use 5% to 6% nominal, or about 3% real.
- Aggressive portfolio (70% to 90% stocks): Use 6% to 7% nominal, or about 4% real.
These ranges assume a diversified mix of domestic and international holdings across large, mid, and small companies on the stock side, and investment-grade bonds on the fixed-income side. If your portfolio is concentrated in a single sector or asset class, historical averages for balanced portfolios won’t apply to you.
Your Time Horizon Changes the Equation
If you’re 30 years from retirement, you have decades for market recoveries to smooth out the rough patches, which supports using a rate closer to the higher end of the range for your allocation. If you’re five years out, a bad stretch at the wrong time could wreck your plan, so leaning toward the conservative end makes more sense.
Once you’re in retirement, the math shifts again. A prolonged downturn in your first few years of withdrawals can permanently damage a portfolio, a phenomenon planners call “sequence of returns risk.” This is why many retirees gradually shift toward more conservative allocations as they age, which also means their assumed going-forward return should decrease.
How Withdrawal Rates Fit In
The interest rate you use during the accumulation phase (while you’re saving) is a different question from the withdrawal rate you use once you’re spending down your portfolio. The classic “4% rule” says you can withdraw 4% of your portfolio in year one of retirement, then adjust that dollar amount for inflation each year, and your money should last 30 years.
William Bengen, the financial planner who originated that rule, has since updated his research. His current default safe withdrawal rate for a 30-year retirement is 4.7%, assuming a portfolio of roughly 55% stocks and 45% bonds with some cash. For a longer retirement of 50 years, he puts the safe rate closer to 4.2%. These figures represent the worst-case historical scenario, meaning even during periods of high inflation and poor stock market performance, the money would have lasted. In more favorable conditions, you could safely withdraw more.
Bear markets or high inflation in the early years of retirement pose the biggest threat. If stocks drop 30% right after you retire, withdrawing the same dollar amount consumes a much larger share of your shrinking portfolio, making recovery harder.
Run Multiple Scenarios
The honest answer is that nobody knows what returns will look like over your specific retirement horizon. Rather than agonizing over the “right” single number, run your projections at two or three different rates. A common approach is to model an optimistic scenario at 7%, a baseline at 5%, and a conservative scenario at 3% to 4%. This gives you a range of outcomes instead of a single point estimate that’s almost certainly going to be wrong in one direction or the other.
If your retirement plan only works at 8% or higher, that’s a signal you need to save more, work longer, or spend less in retirement. If it works even at 4%, you’re in strong shape regardless of what markets do. The goal isn’t to predict the future. It’s to build a plan that holds up even when markets disappoint.
A Practical Starting Point
If you want a single number to start with, 6% nominal (before inflation) for a balanced portfolio is a reasonable middle ground that most planners would consider neither reckless nor overly pessimistic. For a quick sanity check in today’s dollars, use 3% to 4% real. And if you’re already using a tool like Fidelity’s retirement planner, know that its built-in 3.5% assumption is deliberately conservative, designed to nudge you toward saving more rather than less. That’s not a bad instinct, but it may make your situation look bleaker than it needs to be.
Whatever rate you choose, revisit your assumptions every few years. Your portfolio allocation will change, market conditions will shift, and your retirement timeline will get shorter. A rate that made sense at 35 may not fit at 55.