Rosalind Evans
In the realm of retirement planning, setting realistic expectations for investment returns is crucial. While envisioning lofty returns on your retirement savings is enticing, a recent debate among financial experts sheds light on what constitutes a realistic rate. Suze Orman and Dave Ramsey have historically projected a 12% annual rate of return for investments like the S&P 500 index fund. However, a retirement research expert, David Blanchett, vehemently disagrees, calling such assumptions “absolutely nuts.” This article delves into the nuances of these differing perspectives, offering valuable insights for anyone planning for their financial future.
“Letting your money work for you” is a common mantra in retirement investing, but how much growth can one realistically anticipate? The annual rate of return, a crucial measure of investment success, has sparked significant debate among financial experts. In an interview with The Wall Street Journal, a personal finance expert, Suze Orman, suggested that a 25-year-old could expect a 12% return over 40 years by investing in an S&P 500 index fund. Dave Ramsey echoes this sentiment, consistently using a 12% return estimate in his advice.
Contrarily, David Blanchett, PGIM DC Solutions’ head of retirement research, challenges this optimistic assumption. He argues that such a high rate of return fails to account for factors like market volatility and inflation. Blanchett advocates for more conservative estimates: 5% for a balanced stocks and bonds portfolio and 7% for a portfolio with aggressive stock exposure.
The concept of compounding underpins Orman’s 12% rate example, intended more as a lesson on the power of early and consistent investing rather than a guaranteed return rate. She emphasizes the importance of starting investments early, highlighting the exponential benefits of compound interest over time. Furthermore, Orman and Blanchett caution investors to brace for less optimistic outcomes, suggesting a more conservative 4% to 6% return expectation.
Blanchett also highlights the discrepancy between arithmetic and compounded returns, illustrating how simple average calculations can be misleading regarding investment returns. He stresses the significance of understanding compounded returns to better navigate investment volatility.
The variability of returns also depends heavily on an individual’s asset allocation, as noted by Brian Spinelli, a financial planner and co-chief investment officer at Halbert Hargrove Global Advisors. The choice between stocks and bonds, or a mix thereof, directly impacts expected returns. Spinelli advises aligning investment choices with one’s time horizon and cautions against frequent significant shifts in asset allocation.
Navigating the complex world of retirement investment requires a balanced approach between optimism and pragmatism. While the allure of high returns is undeniable, experts like Orman, Ramsey, Blanchett, and Spinelli underscore the importance of setting realistic expectations, understanding the intricacies of compounded interest, and aligning investments with personal financial goals and timelines. As retirement planning evolves, these insights offer a valuable compass for new and seasoned investors aiming to secure their financial future.
