Are you diligently saving and investing for retirement? Yes? If so, good for you! But hold on -- what kind of average annual returns are you using in your estimates of growth? Many investors are operating on pure guesses, without much context or perspective. For example, the stock market's average annual growth rate over many decades has been around 10%. So should you use that number? Well ... maybe not. It's just an average, and you might end up with lower returns during your investing time period.
Check out how much of a difference your growth rate makes. Here's how much you'll end up with after 25 years if you invest $10,000 per year:
|
$10,000 Per Year Growing at ... |
Becomes ... |
|---|---|
|
4% |
$430,000 |
|
6% |
$580,000 |
|
8% |
$790,000 |
|
9% |
$920,000 |
|
10% |
$1.08 million |
|
11% |
$1.27 million |
|
12% |
$1.49 million |
|
15% |
$2.45 million |
See? If you're counting on 10% but you end up with 8%, you'll be expecting almost $300,000 more in your nest egg than you'll actually get. And the higher your expectations are, the more you could end up falling short.
Just imagine that you were expecting a nest egg of $1.08 million, and you ended up with $790,000. If in retirement you withdraw the 4% recommended in our Rule Your Retirement newsletter (adjusting it for inflation each year), your first year's take will be $31,600 when you were expecting $43,200. That's quite a difference.
Don't guess too low ...
So should you just guess low? Well, yes, but only within reason. Overdo it on the low end, and you may end up either pinching too many pennies and not enjoying life enough, or just giving up entirely because you think you won't have a chance of reaching your goals. Given that the historical average for stocks has been around 10%, using a conservative estimate of 7% or 8% might be sound -- or try for a range, like between 7% and 11%.
Remember that you can earn the market's average return via an inexpensive index fund -- and you can try to enhance that return by adding some individual stocks. Here are some five-star companies I found with the screener in our Motley Fool CAPS community:
|
Company |
3-Yr. Avg. Revenue Growth Rate |
3-Yr. Avg. EPS Growth Rate |
|---|---|---|
|
Transocean |
56% |
69% |
|
Petroleo Brasileiro |
27% |
21% |
|
Vale |
41% |
42% |
|
Sasol |
20% |
18% |
|
Noble |
28% |
51% |
|
Mechel |
39% |
43% |
|
Arcelor Mittal |
66% |
14% |
Data: Motley Fool CAPS.
Evaluating sensibly
So should you run out and buy these companies? No, not without further research. Sure, top ratings are very promising. But this isn't enough information. You might, for example, think more of a company with 25% growth than one with 20% growth, but if the latter company has much higher and growing profit margins, then the lower-growth stock might actually be a better choice.
Remember, too, that not all numbers are alike. This applies whether you're looking at the companies above or researching companies in general. A company might sport a steep earnings-per-share (EPS) growth rate, for example, but if it's much higher than revenue growth, it may not be sustainable for too long. And even revenue numbers are not all alike -- look to see whether a company is generating its revenue from operations, or investments, or from selling off assets.
By having reasonable goals and expectations, and saving and investing accordingly, you can set yourself up for a comfy retirement!
Learn more:
- How to Salvage Your Retirement
- America's Great Forgotten Retirement Plan
- 4 Ways to Destroy Your Retirement
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