The typical approach to estimating a rate of return is to look at average annual returns for some historical period. For instance, from 1926 to 2007 (82 years), the average return for the stock market as measured by the Standard & Poor's 500 (S&P 500) was 10.4%. Change the period to 1958 to 2007 (50 years) and the return changes to 11.0%, 12.7% from 1983 to 2007 (25 years), and 5.9% from 1998 to 2007 (10 years).* Assume you want to save $1,000,000 in 30 years. To reach that goal, you need to save $5,635 annually at 10.4%, $5,025 at 11.0%, $3,616 at 12.7%, and $12,873 at 5.9%.

It's tempting to use the highest return possible, since that results in the lowest savings amount. But consider using a conservative estimate. If you save too much, you can always reduce savings in later years or spend more in retirement. The alternatives are far less attractive if you don't save enough. Consider the following points:

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

• Factor in inflation. When estimating inflation, factor in a long time period. For instance, inflation, as measured by the consumer price index, averaged 3.1% since 1926 (Source: Bureau of Labor Statistics, 2008).

• Watch your pattern of 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 balance 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 2007 of 10.4% and subtracting 3.1% inflation would result in a return of 7.3%. 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 significant portions of your income aren't bad things.

* Source: 2008 Ibbotson Stocks, Bonds, Bills, and Inflation Classic Yearbook. 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.