Set Realistic Targets

Back when I was running marathons, I would often use an online pace calculator to help me predict my time in the next big race. This calculator would take times from a shorter distance, like a 5K race or half-marathon, and predict my marathon time. Quickly, I learned that the farther I had run at verifiable pace in a race (i.e. a half-marathon), the more likely the calculator would spit out something reasonable and attainable for longer distances. With the shorter distances (3.1 miles), it felt more arbitrary. (Think junk in…junk out.)

Pacing calculators remind me of what it’s like to use a modern-day retirement calculator. You may be familiar with how these tools work as they’re all over the Internet. Typical inputs are rate of investment return, rate of inflation, years until retirement, and expenses (spending) in retirement. Just a few keystrokes and presto, you’ll know how long your money will last!

Sadly, most of these variables are relative unknowns with varying levels of, well, variability. Most people can take a reasonable stab at years until retirement, spending and rate of inflation, but it’s the estimate that investors use for rate of return that scares me.

History can, in many ways does, paint an unrealistic picture. It’s helpful to look at some historical returns for perspective. (Source:

Somebody might look at the chart above and think 10% seems reasonable, but I do have two concerns right off the bat with returns that seem this high. (I categorize any return greater than 8% as too high for your retirement calculator!)

These figures assume that you invested your money at the exact beginning of these periods and let the money sit unfettered until the exact end of the period. This is highly unlikely. Rarely does money sit this long (untouched), and the rate of return you experience has much more to do with the exact time the bulk of your savings is invested.

That gives me pause, but the next point keeps me up at night.

These are dramatically different times! After all, we have experienced two cataclysmic bear markets in this century. As you know, during a bear market, prices fall and widespread pessimism causes the stock market's downward spiral to be self-sustaining. It’s not a particularly pleasant time to be an investor and, yes, there have been two brutal Bear markets in recent memory.

So, if you ignore modern history, you will be doing it at your own retirement peril. For this more relevant period (2000 – 2016), the actual compound rate of return is a more pedestrian 4.47%, which includes dividends being reinvested.

Let me explain. This assumes that you have been invested in a fund that follows the S&P 500 to a tee and you choose to let all the dividends reinvest. Further, we assume that were invested in this index for the entire period. What if you only owned 20 stocks and they didn’t pay dividends as often or as much. Would your return be affected? Absolutely.

If we change our inputs a bit and assume no dividends, the return drops to 2.51%. Even if we meet in the middle and choose 3.5%, you’ll see it has not been a very good century for stocks.

It’s not the retirement calculator, it’s the inputs. Garbage in, garbage out.

What rate of return do I use in my calculations? I use 5 to 6% for the following two reasons.

First, it’s more in line with what’s happening in this century and doesn’t harken back to a time before I was born. Second, and more importantly, if the numbers don’t look as rosy (because of more realistic assumptions), my clients will save more. And that will be better for the long run – no matter what the retirement calculator tells you.

That’s just the way it works!