What Is a Reasonable Rate of Return During Retirement?

Learn the essentials of managing your 403(b), 457, and rollover investments. Learn about reasonable return rates, market impact, and how to optimize stock and bond allocations.

Why Your Retirement Start Date Determines Your Average 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.

I ran a hypothetical calculation of a well-known stock mutual fund using that date (February 1999), a $1 million starting investment, and 5% yearly withdrawals. At the end of those ten years, the account was worth a little over $600,000.

By contrast, investing $1 million in the same fund with 5% annual withdrawals during the best ten-year stock market period (August 1990–August 2000) ended with over $3.5 million. In that case, 5% of $3.5 million generates $175,000 a year in future retirement income, while in the February 1999 scenario, 5% of $600,000 gets you only $30,000 per year.

In February of 1999, the stock market, much like today, was highly priced. The same goes for 2007 before the financial crisis. In the 1999 dot-com 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.

Why Today’s High Valuations Demand a New Strategy

U.S. valuations remain at historic extremes. The Buffett Indicator (total market value vs. GDP) is ~220% today, well above the ~144% seen at the 2000 peak. For a detailed breakdown of how current market multiples compare to past cycle tops, examine my analysis of U.S. debt and stock market valuations across 1929, 1999, 2007, and today.

Andrew Smithers’ final April 2025 update places both the Q Ratio and CAPE at roughly three times long-run “fair value.” In plain terms: you are paying premium prices, so future returns can be significantly more variable. CAPE (Shiller) smooths earnings over 10 years so we can compare across cycles.

Two Market Views: Random Walk vs. Mean Reversion

There are two main perspectives on stock market behavior:

• Random Walk Theory: Suggests that the market is always correctly priced and that future returns (whether positive or negative) are driven purely by new, unpredictable information. Many academics support this theory.
• Negative Serial Correlation (Mean Reversion): Posits that periods of extreme above-average returns are followed by outcomes in the opposite direction. This view is supported by structural valuation metrics such as the Buffett Indicator, the CAPE ratio, and the Q Ratio.

I believe in Negative Serial Correlation; periods of extreme overvaluation rarely end quietly. They often unwind through crashes or prolonged lost decades.

How Markets Have Reacted After Past Peaks

Notice 2022: stocks and Treasuries dropped simultaneously by 18%, proving that a standard, unhedged 60/40 mix does not automatically offer protection when interest rates spike.

Finding Your Guardrails: The Right Stock & Bond Mix

Another well-known, more conservative fund holding about 30% in bonds produced around $860,000 after the worst ten-year period and $2,200,000 after the best under those exact same withdrawal scenarios.

The math gets simple: your portfolio will fall in value if you withdraw a higher percentage than you are earning. On the other hand, if your net gains exceed withdrawals, the portfolio rises and helps cushion the impact of rising prices by generating more income.

Having a percentage of retirement money in bonds cushions drawdowns. However, for Massachusetts educators and public employees, you already hold an actuarial safety net: an MTRS or MSERS pension. Learn how this guaranteed income acts as a $1.2M+ bond substitute by aligning your 403(b) and 457 risk tolerance with your pension floor.

Your 3-Step Plan for Massachusetts Public Employees

1. Introductory Meeting: Schedule an intro call (in person, over the phone, or via Zoom) to evaluate your situation.
2. In-Plan Allocation & Fee Review: Have me conduct an independent fee and performance review of your 403(b) or SMART Plan to identify hidden annuity charges and evaluate investment performance.
3. Personalized Strategy: Receive written recommendations aligned with today's high valuation backdrop and your personal retirement timeline.