What average pension growth rate should you use when trying to achieve your retirement goals? A comfortable retirement depends on not being too optimistic about what your pension funds can deliver.
Unrealistic assumptions can put your plans in peril.You can see this by experimenting with different pension growth rates in a retirement calculator.
An over-optimistic pension projection
Growth rate 9% per year over 35 years.
Projected retirement income = £27,000 p.a.
High return (9 per cent) pension projection = healthy annual retirement income of £27,000 after 35 years of investing £425 a month.
A historically realistic pension projection
Growth rate 7% per year over 35 years.
Projected retirement income = £14,000 p.a.
Medium return (7 per cent) pension projection = a tight retirement income of £14,000. You’ll need to increase your £425 monthly contributions if that income falls short of how much you need to retire
A low growth pension projection
Growth rate 5% per year over 35 years.
Projected retirement income = £7,000 p.a.
Low return (5 per cent) pension projection = a poor retirement income. The main remedy when returns are this low is to increase monthly pension contributions so you can reach the income you need.
As you can see, changing the annual average pension growth rate leads to massive differences in final incomes.
The worst mistake you can make is to base your retirement plans on an unrealistic growth rate. If your pension fund returns fall short then you won’t have put enough away to meet your income needs.
What’s a realistic average pension fund growth rate?
Sadly, short of being mates with Dr Who, there is no way of knowing your future returns.
We can speculate about what might happen.
- Years of dystopian low growth as the world deglobalises?
- Or a golden age of AI-generated miracles powered by hydrogen and the blockchain?
Pick your forecast!
A more practical method is to use long-term historical returns. With over one hundred years of data to call upon, historical returns are a reasonable gauge of market behaviour through thick and thin.
This approach doesn’t tell us what will happen – it offers us no guarantees whatsoever – but it does inform our pension planning with a more realistic baseline.
Using historical returns
The longest-term, average annualised return you can get is the number to use.
- The UK equity average annualised return1 is 5.4% from 1900-2021.
- Global equity annualised returns are around 5.3% over the same period.
- Those numbers are real returns – meaning they strip out inflation.
- Most retirement calculators assume nominal returns. They expect growth rates to include an inflation estimate.
- So you could add an average inflation expectation of 3% to the real returns above.
- That gives you an 8.3% global equities growth rate for your retirement calculator.
- However, it’s important to use asset return numbers that reflect your actual portfolio composition.
- And few investors can stomach 100% equities as they get older. Our risk tolerance tends to decline with age.
- UK government bonds have delivered an average annualised real-return of 1.8% from 1900-2021.
- That means a more typical 60/40 portfolio (60% equities / 40% bonds) has historically achieved around 4% after inflation.
- So 7% (4% real return + 3% inflation) is a reasonable average pension growth rate based on historical returns.
Are there any alternatives?
Yes, one approach is to use expected returns. They’re typically based on current market valuations.
The equations that underlie expected returns adjust for influential factors like whether the market is considered to be over- or under-valued.
These predictive models aren’t necessarily more accurate than using historic returns. But they’re a very useful second opinion. Especially when markets are thought to be over-valued – as they are now.
Many commentators forecast that high valuations mean we can expect future returns to be lower than in the past.
This FCA report sets out the case for lower annual real returns over the next 15 years.
It assumes 4.5% for equities and -0.5% for government bonds.
You can also construct your own, up-to-date, expected returns for every asset class in your portfolio. This post on the Gordon Equation shows you how.
Remember: the higher your rate of return, the greater the risk that the markets will fail to deliver. Err on the side of caution.
Asset allocation and likely returns
You can influence your average pension growth rate by changing your asset allocation.
Devoting a higher percentage of your portfolio to a diversified range of equities will increase your prospects for higher growth.
This move increasesrisk.
The less risk you can tolerate, the more you need to dampen down your portfolio’s volatility with government bonds. But increasing the amount of bonds in your portfolio lowers your prospects for growth over time.
This trade-off is the nub of investing.
Ultimately, whatever average pension growth rate you choose, the reality will probably prove quite different. Prepare to adapt over time by adjusting your plan’s key components.
And be sure to consider all the other aspects of retirement planning to put yourself in the best possible position.
Take it steady,
The Accumulator
- Returns are total returns which assume you reinvest dividends and interest. [↩]
FAQs
So 7% (4% real return + 3% inflation) is a reasonable average pension growth rate based on historical returns.
What is the average growth rate of pensions? ›
The average growth rate for the 22 largest pension markets worldwide was estimated to be 10.4 percent between 2022 and 2023, and the ten-year compound annual growth rate until 2023 was estimated to be 3.8 percent.
What is the average growth rate of a retirement fund? ›
Average annual 401(k) return: 9.7%
Many variables determine a 401(k)'s return, including the investments you choose, stock market performance and 401(k) fees.
What is the average growth of a drawdown pension? ›
Pension drawdown assumes a 5.0% fund growth after charges. Pension drawdown is a higher risk pension than annuities and not suitable for everyone. For a drawdown rate specific to your circ*mstances you should complete the flex-access drawdown quote.
What is a good rate for a pension? ›
Pensions, which are payable for life, usually replace a percentage of your pay based on your tenure and salary. A common formula is 1.5 percent of final average compensation multiplied by years of service, according to Littell.
Do pensions grow over time? ›
Employers offering defined-benefit plans regularly contribute money to a fund for employees. The money is invested, allowing it to grow over time. When eligible employees retire, they receive regular fixed payments generally for life, like an annuity.
What is the average return of a pension? ›
The key takeaway is that the long-term annualized return for pension funds is almost the same as that of the 60/40 portfolio (about 6.1 percent for both).
Is a 7% return realistic? ›
While quite a few personal finance pundits have suggested that a stock investor can expect a 12% annual return, when you incorporate the impact of volatility and inflation, 7% is a more accurate historical estimate for an aggressive investor (someone primarily invested in stocks), and 5% would be more appropriate for ...
Is $600,000 enough to retire at 70? ›
Summary. It is possible to retire with $600,000 if you plan and budget accordingly. With an annual withdrawal of $40,000, you will have enough savings to last for over 20 years. Social Security retirement benefits can increase your monthly income by approximately $1,900.
What is a realistic return on retirement investments? ›
Many consider a conservative rate of return in retirement 10% or less because of historical returns. Here's what you need to know. Need help planning for retirement? A financial advisor can help you manage your portfolio, figure out how much income you'll need and assist in other important decisions.
It may be possible to retire at 45 years of age, but it depends on a variety of factors. If you have $500,000 in savings, then according to the 4% rule, you will have access to roughly $20,000 per year for 30 years. Retiring early will affect the amount of your Social Security benefit.
How long will $800,000 last in retirement? ›
As the above table shows, $800,000 in savings can last between 20 and 30+ years, depending on how much you spend each year. Using these calculations, if you retire at 50 and need savings to last for 30+ years until you are aged 80 or older, you can withdraw up to $40,000 annually, or approximately $3,333 monthly.
What is the 4 percent pension drawdown rule? ›
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
How many people have $1,000,000 in retirement savings? ›
Nearly 399,000 Americans also have a least $1 million in an individual retirement account. The key to stashing away such sums? Start early and contribute to your retirement plan consistently over many years, Fidelity said.
Is $10,000 a month a good retirement income? ›
Everyone isn't going to want to spend $10,000 net a month in retirement. For some people, that will be way more than they need each month. For others, it might not be enough. And there might be some people that spending $10,000 net a month in retirement is just right.
Is $50,000 a year a good pension? ›
As such, if you have access to a $50,000 annual income in retirement, it may be enough to cover your expenses. Now the one caveat is that over time, inflation might make it so a $50,000 income no longer suffices. But for now, we'll go with that number since it's reflective of what older Americans are spending today.
How much pension will I get after 20 years if I retire? ›
For example, retiring with 20 years of service means your retirement pension will be 50% of the highest 36-month pay average. Waiting to leave after 40 years will make your pension 100% of your monthly pay average.
What is a typical annuity growth rate? ›
Most annuities have a 4% to 6% annual return, although some are as high as 8%. Many also charge annual fees, typically between 1% and 3% of your account balance, to cover administrative costs, trading fees, commissions, premium taxes, surrender charges and other expenses.
What is a 5 year pension payout? ›
Five-Year Certain
This form of payment provides a monthly pension to you for your lifetime with the guarantee that if you die before receiving 60 monthly pension payments, the remainder of the 60 monthly payments will be paid to your designated beneficiary.
What is the average pension in the USA? ›
What is the average retirement income by state?
| State | Average retirement income |
|---|
| Alaska | $36,023 |
| Arizona | $28,725 |
| Arkansas | $21,967 |
| California | $34,737 |
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