What Rate of Return Should You
Target?
 Of
course, there’s no guarantee your investments will grow each year. Some
years your investments may be up…and other years they’ll be down.
How much you earn on your investments over the years is referred to as your "average
annual rate of return."
So how much do you need to earn on your investments each year to reach your
retirement goals? That depends on how much money you save each year...and how
long you have to invest.
The more you save, the lower the return you need to earn.
Have you used our DEFER™ Estimator to see what percentage of your pay
to contribute to your retirement
plan? (If you haven’t done this yet, click here.)
If you have used this tool, you may have noticed that you could defer different
percentages of pay—for different rates of return. For example, if you expect
to earn 6.5% on your investments, you may find you need to contribute 8% of your
pay. But if you expect to earn more, you could contribute less. So the more you
save, the more conservative you can be in your earnings estimate.
The longer you have to invest, the more aggressive you can be.
How much you need to earn depends on how long you have to invest. The longer
your time period, the higher the rate of return you may want to target. Earning
a little more each year can add up to a lot more after many years, as the chart
below shows. Just keep in mind that the higher the rate you target, the more your
investments will go up and down.
| Say you save $200 a month and... |
you average this annual rate of return…
|
Here’s how much you could have after 30
years. |
6.5% |
$221,235 |
8.0% |
$298,071 |
9.3% |
$389,854 |
10.5% |
$503,280 |
|
12.0% |
$698,992 |
*This example is hypothetical and for illustrative purposes
only. Rate of return does not reflect the actual return of any specific investment
and is not intended to imply or guarantee future results. Regular investing does
not guarantee a profit or protect against a loss in a declining market. Because
the value of your investment will fluctuate with market conditions, you should
consider your ability to continue investing during periods of low price levels.
So what rate of return should you target?
Use the interactive worksheet below to help you match how long you have to
invest with a suggested rate of return.
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