Planning for retirement can be quite daunting given the multitude of questions to tackle and gaps to fill. When faced with numerous unknowns, where do you even start?

Rest assured that you’re not alone if you’ve ever felt a bit stuck in planning for your future. After all, the game changes entirely if you envision retiring in a place with a reputation for sky-high living costs like California, compared to a more wallet-friendly option like Thailand. Plus, who can predict the curveballs life might throw your way between now and retirement?

But even with all the unknowns, you should still visualize what you want your retirement to look like and set goals to achieve, even if those goals need some fine-tuning along the way.

One such goal is figuring out the rate of return to aim for when investing for retirement. It’s a goal that might need some tweaking as your circumstances change, but it’s an essential variable in connecting the dots. Why? Because it helps you figure out another missing piece of the puzzle — how much you need to save for retirement. 

What Rate of Return Should I Use for Retirement Planning?

If you’re curious about what rate of return you should use for retirement planning, stay tuned. We’re about to break it down into a few key factors:

  1. Your time horizon
  2. Your risk tolerance
  3. Your asset allocation

If you’re all in for securing your future, let’s jump right in!

1. Your Time Horizon

Your time horizon is the stretch between now and when you need to tap into your retirement nest egg, and it significantly shapes your investment strategy and the rate of return you aim for.

If you have a longer time horizon, it gives you the flexibility to have a more diversified portfolio that includes a mix of assets with varying levels of risk and potential return because you have the leeway to ride out the ups and downs of the market.

Conversely, if you have a shorter time horizon, your focus might pivot from chasing growth to protecting the nest egg you’ve worked hard to build. Adopting a more preservation-oriented strategy could mean streamlining your investment choices to more conservative options, like bonds, which generally offer lower returns.

Historically, the average annual rate of return for the overall stock market, measured by indices like the S&P 500, has been around 10% per year. That might sound like an appealing annual rate of return on retirement investments, but the reality is that there are years when the market falls short of expectations and others when it will exceed them. 

What does that mean for you? It means you need to align your investments with the timeline leading up to your retirement. 

Imagine you’re two years away from retirement. Opting for a higher-risk portfolio in pursuit of a stellar 10% annual return might not be the most strategic move because those two years may turn out to be turbulent in the markets. You’d risk a loss you might not fully recover from.

The consensus is that the longer your time horizon, the more risk you can afford to take and the higher the rate of return you can target, given the time you have to recover from any setbacks. But it’s not just about the time you’ve got — it’s also about the volatility you can stomach, which we’ll cover next!

2. Your Risk Tolerance

Every investor dreams of reaping all the rewards, but not everyone can shoulder all the risks needed to achieve those rewards. 

Enter risk tolerance, a key factor in deciding the appropriate rate of return for your portfolio. We’ve touched on how your time horizon influences your risk tolerance, but let’s not forget the more personal and emotional aspects — considerations like your financial needs and goals and your comfort level when investing.

Your Financial Needs and Goals

The magnitude of your goals has a direct impact on your risk tolerance. For some, the objective might be as straightforward as securing a comfortable retirement without outliving their nest egg.

Meanwhile, some aspire to more profound objectives, such as aiming for a secure retirement while concurrently creating a lasting legacy for future generations. Such ambitious objectives might call for higher returns and a willingness to take some risks over the investment horizon.

Your Comfort Level

No matter your age, current circumstances, or goals, the bottom line is this: some investors can handle the natural highs and lows of the markets, while others find it highly nerve-wracking.

If there’s a disconnect between your risk tolerance and the actual risk in your portfolio, it can result in emotional stress and less-than-ideal investment decisions—such as deciding to cash out your entire portfolio when things start getting a bit shaky.

If you prefer a more conservative approach due to a low-risk tolerance, it might require you to boost your savings to reach your financial goals. 

You probably have a broad sense of your risk tolerance from what we’ve covered here, but if you want to take it a step further, find out if any of your financial institutions offer a risk tolerance questionnaire. Alternatively, you can consult with an advisor who can provide more personalized insights into your specific circumstances.

3. Your Asset Allocation

Let’s backtrack for a moment to the fact that the average annual return for the overall stock market, as measured by indices like the S&P 500, has historically hovered around 10% per year. 

The S&P 500 is a market index that tracks the performance of the 500 largest (and some of the most successful) public companies in the U.S. (think: Johnson & Johnson, Procter & Gamble, Berkshire Hathaway, Apple, Microsoft, to name a few).

With that in mind, it’s not practical to stash all your eggs in bonds and cash and anticipate a similar outcome to the historical performance of the overall market. Similarly, going all-in on one of the riskier asset classes — equities — doesn’t quite align with the goal of low-risk investments with minimal downside.

How you divide your portfolio across various assets matters in determining a realistic rate of return. 

To get a snapshot of your current portfolio, you should be able to log into your account(s) or review statements to find a breakdown of your investments and their historical performance and returns. Understanding your current allocation and its historical performance is a helpful way to gauge a realistic rate of return for the future (and helps you assess if any changes are in order!).

Just like your time horizon and risk tolerance, your asset allocation might require some fine-tuning as you navigate different phases of life and adapt to the ever-changing market landscape.

Assembling the Pieces to Find Your “Ideal” Rate of Return

It’s no secret that personal finance is, well, personal. There isn’t some generic instruction manual for pinpointing the perfect rate of return for retirement (and not to mention that this “perfect” rate would change over time).

Online calculators come in handy for plugging in variables like your age, current nest egg, and monthly savings and crunching the numbers to give you an idea if you’re on the right track or if some tweaks are in order.

Nonetheless, drawing from our experience, we understand the intricacies of assembling all the pieces for a comprehensive and strategic retirement plan. We understand that, for some, figuring out what rate of return they should use for retirement planning or crafting any part of their own retirement plan can be intimidating.

If that’s you, we’d love to get to know you and see how we can help you get unstuck in planning for your future, so send us an email at or give us a call at 877.333.1015 to grab some time on our calendar! We can’t wait to learn more about your goals and work together to fill in the missing pieces, guiding you toward the retirement you’ve always envisioned.