For instance, from 1926 to 2004 (79 years), the average return for the stock market as measured by the Standard & Poor’s 500 (S&P 500) was 10.4%. Change that period to 1955 to 2004 (50 years) and the return changes to 10.9%, 13.5% from 1980 to 2004 (25 years), and 12.1% from 1995 to 2004 (10 years).*

It’s tempting to use the highest return possible, since that would result in the lowest savings amount. Instead, consider using a conservative estimate. If you save too much, you can always reduce savings in later years or spend more money in retirement. The alternatives are far less attractive if you don’t save enough. Consider the following points when deciding on an expected long-term rate of return:

• Your investment time frame will probably encompass decades. Thus, consider using a historical rate of return covering a very long time frame, making adjustments from there.

• Factor in inflation. Inflation, as measured by the consumer price index, averaged 3% since 1926 (Source: Bureau of Labor Statistics, 2005).

• Watch your pattern of actual returns. Even if you get the average rate of return exactly right, your portfolio’s balance will depend on the pattern of actual returns during that period. Some years will experience higher than average returns, while other years will have lower or even negative returns. If you experience higher returns in the early years, your portfolio will be lower than if those returns occurred in the later years. If you encounter negative returns in the early years, you will have a higher balance than if those negative returns came in the later years. Assess your portfolio’s progress every year so you can make adjustments along the way.

What is a reasonable long-term rate of return to use for stock investments? Starting with the average return from 1926 to 2004 of 10.4% and subtracting 3% inflation would result in a return of 7.4%. You may even want to use a more conservative return if you feel the stock market may encounter an extended period of below-average returns. Sure, that means you’ll need to save more every year, but learning to live within your means and saving a significant portion of your income aren’t bad things.

* Source: Stocks, Bonds, Bills, and Inflation 2005 Yearbook, Ibbotson Associates. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. Investors cannot invest directly in an index. Past performance is not a guarantee of future results. Returns are presented for illustrative purposes only and are not intended to project the performance of a specific investment.