What Is a Reasonable Rate of Return After Retirement for Retirement Funds

Summary: Learn Tim's advice for securing a retirement with a reasonable rate of return. Discover key factors to consider after retiring, ways to maximize returns, and how to make informed decisions for a prosperous future.

Overview of the Importance of a Reasonable Rate of Return

After retiring, a crucial decision is deciding how much of your retirement money to keep in stocks and bonds.

Over the long term, stocks provide a better return but more volatility. If you were the unlucky person retiring in February 1999, your 10-year future stock market return was -3% a year.

Factors to Consider When Determining a Reasonable Rate of Return

I ran a hypothetical of a well-known stock mutual fund using that date (February 1999), a one-million-dollar investment, and 5% yearly withdrawals. At the end of those ten years, the account was worth a little over $600,000.

That same fund and a $1 million investment and 5% annual withdrawals during the best ten-year stock market returns (Aug 1990–Aug 2000) ended with over $3.5 million.

5% of $3.5 million generates $175,000 a year in future retirement income, while 5% of $600,000 gets you only $30,000 per year.

Another well-known but more conservative fund with about 30% in bonds with those same scenarios had around $860,000 after the worst ten-year period and $2,200,000 after the best.

Strategies for Maximizing Returns

The math gets simple: your portfolio will fall in value if you withdraw a higher percentage than you are earning, but on the other hand, if you are lucky and make more than you are taking out, the portfolio will rise and help cushion the impact of rising prices by generating more income.

Stocks provide the best opportunity to generate a higher return than the 5% you withdraw each year. However, because they are susceptible to significant drops like in 2000 and 2008, too many of them can put your retirement income goals at risk.

Types of Investments That Can Provide a Reasonable Rate of Return

Having a percentage of retirement money in bonds will reduce the large drops. However, it will also reduce the gains someone with a larger stock share may earn.

In February of 1999, the first scenario, the stock market, much like today, was highly-priced. The same goes for 2007 before the financial crisis. In the 1999 Dotcom bubble, the NASDAQ dropped 78%, while in the 2008 financial crisis, the S&P 500 fell 46%. Big drops like these cause much of the subpar future yearly returns.

Rebalancing Your Portfolio

Because the stock market is significantly overvalued at this time, now is a good time to consider rebalancing your portfolio. By rebalancing instead of selling what has gone down or buying what has gone up, investors remain diversified but go back to their original allocation.

So while diversification is about the eggs, asset allocation is about the basket. What percentage of your basket is going to be in stocks and bonds?

For example, if six years ago you were comfortable with an asset allocation of 60% in stocks and 40% bonds, now, after the doubling of the stock market, that portfolio might be 75% stocks and 25% bonds. Rebalancing simply puts your asset allocation and its risk level back to the original 60/40.

Retirement accounts are ideal for re-balancing, because they enable you to buy and sell within the account with no tax consequence, and usually no fee or commission.

Investors approaching retirement who fail to rebalance might unwittingly end up closer to retirement with a riskier portfolio. That is why, when such investors rebalance, they might want to update their targeted allocations. For example, an investor with a portfolio that was 60/40 five years ago and now 75/25 could rebalance to 35% stocks and 65% bonds.

These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.

Tim Hayes

Tim Hayes

Tim has offices located in Boston and South Dartmouth, Massachusetts. He is licensed to handle securities in six states, including Massachusetts, Rhode Island, New Hampshire, Connecticut, Maine, and Florida. Moreover, he can provide investment advisory and financial planning services to clients in all 50 states.

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