Ask Moneysense: Retirement planning

What kind of returns should you assume when planning for retirement?



From the November 2012 issue of the magazine.


Many retirement calculators assume a balanced portfolio will return 8% a year over the long term. Is that still realistic?

—Gary Briggs, Lethbridge, Alta.

In a word, no. In fact, planning your retirement with the expectation of 8% returns is wildly optimistic. “Certainly that’s too high,” says Ted Karon, an investment counsellor at Kerr Financial Group in Toronto. “That’d be a pretty aggressive portfolio.” A realistic long-term return for a balanced portfolio is probably a more modest 4% to 6% after fees. But you have to consider those numbers in the context of inflation. It wasn’t long ago that bonds were yielding 6% or 9% and stocks were generating over 10% annually, but inflation was ticking away at 4% or higher. Investors may grumble about a 5% return today, but a typical balanced portfolio is still pulling ahead of inflation by 3%. “The real return is the key number you’re looking for,” says Karon.

As ambitious as 8% returns may seem today, that’s not far off the historical norm for a portfolio of 60% stocks and 40% bonds, which explains why some online calculators still use that figure. Ted Rechtshaffen, president and CEO of TriDelta Financial Planners, believes markets will gravitate back to these levels. “Clients tell us you can’t get 8%,” he says. “This year that might be true, but over the next 30 years, I’m not so sure.”

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