"Safe" Rate of Return Assumption?

AprilZ81 · April 2015

Is 7% return still a "safe" assumption for retirement planning for ROTH and 401k contributions?

I was doing some calculations and the 7% was what was put in the field of the calculator automatically.That seems fairly standard and in line with what I've heard but I don't want to get too excited about the number that produces if it is an aggressive estimate.

Sisugal · April 2015

I would look at historical % rate of returns over a longer period of time. (10-20 years) - and not the last 5 years of stock market returns if you are looking at "safe" number for investment choices.
The stock market is not something that is always safe - you can lose are well as make money.
7% is not guaranteed.

simplyelise · April 2015

It really depends on what you are investing in within the Roth and 401k plans. If you are in middle of the road investments and you are going to be leaving them there 20+ years, then from what I've read, that's a fairly conservative ROR estimate.

FWIW, even if one is not a DR follower, I really appreciate his retirement investment strategy:

Dave recommends mutual funds for your employer-sponsored retirement savings and your IRAs. Divide your investments equally between each of these four types of funds:

Growth
Growth & Income
Aggressive Growth
International

Choose A shares (front end load) and funds that are at least five years old. They should have a solid track record of acceptable returns within their fund category.
If your risk tolerance is low, which means you have a shorter time to keep your money invested, put less than 25% in aggressive growth or consider adding a “Balanced” fund to the four types of funds suggested

AprilZ81 · April 2015

Yes, I'm aware I can lose money in the stock market but it would be highly unlikely to lose money over a 30 year investment.

I was just curious if anyone knew if 7% was safe/average or if it would be considered aggressive.

AprilZ81 · April 2015

simplyelise said:
It really depends on what you are investing in within the Roth and 401k plans. If you are in middle of the road investments and you are going to be leaving them there 20+ years, then from what I've read, that's a fairly conservative ROR estimate.

FWIW, even if one is not a DR follower, I really appreciate his retirement investment strategy:

Dave recommends mutual funds for your employer-sponsored retirement savings and your IRAs. Divide your investments equally between each of these four types of funds:

Growth
Growth & Income
Aggressive Growth
International

Choose A shares (front end load) and funds that are at least five years old. They should have a solid track record of acceptable returns within their fund category.
If your risk tolerance is low, which means you have a shorter time to keep your money invested, put less than 25% in aggressive growth or consider adding a “Balanced” fund to the four types of funds suggested

Most of my funds are growth funds due to my age. I have a fair amount in an age based fund that will get more conservative as I get closer to retirement.

vlagrl29 · April 2015

I think 7% is balanced. As of this year Jan-April I have a return of 5% in my more conservative IRA and 18% in my more aggressive IRA.

hoffse · April 2015

Yeah 7% is fairly average. 5% is pretty "safe," 10% is actually the historical average through the entire history of the stock market - but obviously that assumes you don't shift to things like bonds as you age.

Personally, my safer investments have been doing around 8-10% over the last couple of years. My really crazy one has been more like 20-30%. That's been wild to watch, and I don't keep much in it (I also try not to watch - it tests my risk tolerance). Overall, Fidelity says my rate of return has been 17.42% over the last 12 months.

I'm also 28. So I have nothing super safe in my portfolio yet. I probably won't start to shift until I'm in my mid-30's.

For people who have to plan their own retirement and aren't going to receive pensions, the market is really the best way to save enough, especially if you start young enough to ride through the busts. Yes, you can lose money. In fact, there will almost certainly be times when you do - and you might lose all your earnings plus some of your contributions before it corrects itself and starts to go up again (sneeze: 2008). But if you stay invested and you start young, it's pretty safe to assume you're going to end up with net growth on the back end.

For the stock market to completely collapse to the point beyond recovery, we would all be facing bigger issues than our retirement accounts. I'm thinking something like nuclear war. But maybe I'm an optimist.

brij2006 · April 2015

I agree with hoffse. 7% is a safe assumption, but records show that 10% has been the true average. We use 7% when estimating anything. We would rather play it safe and set ourselves up to expect less, and be surprised when it grows more.