What Returns Can You Expect?
Posted by Gail | Filed under Investing
One of the questions I get most frequently is, “Where can I get the returns you quote to people when you tell them how much they’ll have at retirement?”
I know interest rates are low right now. But you know it hasn’t always been this way, right? Or maybe you’re not old enough to remember. I am. I remember 17% interest rates and my ex who is even older talks about when he had to renew is mortgage at 20%. It only lasted six months, but that was a killer six-months in terms of interest costs!
When most people think of saving for the long term they use a formula like this:
“I’ll contribute $a for b years and earn c% on my investments.” It’s the “c” that’s got everyone discombobulated.
When I quoted investment returns on TDDUP, I started using 7% and then dropped down to 5% as the markets slipped. BTW, that’s “investment returns” not “interest rates.”
The average long-term returns from the S&P 500 from 1926 until 2012 was 11.8%, with the best streak showing up from 1991 to 1999 when the returns were almost 450%. There were 63 years when the S&P gave positive returns compared to the 24 years when it dipped into the red.
Five-year T-bonds, naturally, produced lower returns but better than non-investors might expect. Over the same period of time, they returned 5.6%, spent 78 years delivering the goods and sputtering for 9.
Too long for you? How about from 1980 until 2012? That’s just over 30 years, about as long as most people have for their retirement portfolios to grow, unless they’ve been particularly diligent and started really early. The S&P delivered an average return of 12.6%, while bonds delivered 8.7%. My 7% and 5% are looking pretty average now, eh?
If you want the returns I quoted on TDDUP, you have to have a long-term investment time horizon and you have to be willing to assume some of the risk that comes with market investing. You also have to remember that markets rise and fall, as do interest rates, and the only thing you can count on absolutely is that things will change. No one knows when or how, but they’ll change.
Don’t use today’s interest rates as your excuse not to put something aside for tomorrow. If you’re very conservative there are still options you should check out. As one of the rules in Money Rules says, even chickens can be investors. (If you know the correct rule #, I’ll send you one of Jen Phillips’ two pears in a pod. budget wallets. Just leave your comment here with the correct rule number and I’ll randomly draw a name.