Average Rate of Return?

Twointhebush

I've been telling my wife that in a best case scenario we can expect up to a 5% return on our pension savings. Am I even close to the average rate of return?

Haffertee

It very much depends on your investments. If you’re in relatively high risk, high potential return investments then the best case could be better than that. However if you’ve opted for a lower risk option the best case may not be that high.

The best case scenario would also not be the average rate of return so it’s hard to know exactly what question you’re asking?

Brynsam

Why are you telling her that (serious question!)? To encourage her to save more, to 'justify' a transfer from a DB to a DC arrangement...?

Audaxer

Twointhebush wrote: »

I've been telling my wife that in a best case scenario we can expect up to a 5% return on our pension savings. Am I even close to the average rate of return?

You might get 5% average return on investments over the next 30 years, but even if you do there will probably be a lot of volatility even on a medium risk portfolio, which could drop up to 30% in an equity crash. So over the next 10 years the average could well be a lot lower than 5%.

Albermarle

You also have to take inflation into account .
5% above inflation would be a pretty good result and probably only achievable with a higher risk , high equity % portfolio . It would be an even better result if achieved over the next few years , which as mentioned above are predicted to be a bit choppy ( note the word 'predicted' though ….) .
5% including inflation , so a real increase of maybe 2 or 2.5% annually would be the realistic expectation for a typical medium risk 60% equity portfolio ( note the word 'expectation' ….)

Audaxer

Albermarle wrote: »

You also have to take inflation into account .
5% above inflation would be a pretty good result and probably only achievable with a higher risk , high equity % portfolio . It would be an even better result if achieved over the next few years , which as mentioned above are predicted to be a bit choppy ( note the word 'predicted' though ….) .
5% including inflation , so a real increase of maybe 2 or 2.5% annually would be the realistic expectation for a typical medium risk 60% equity portfolio ( note the word 'expectation' ….)

I agree. My returns this year so far on a medium risk portfolio are much higher than that, but they are very unlikely to continue at that rate. I'd be very happy with an average 5% return including inflation.

Albermarle

I have a more cautious/defensive approx. 40% equities and I am hoping for about around 1.5% real return after inflation . If the market does drop significantly , I will probably dive in and up the equity % a few points.

Prism

Its a bumpy ride and impossible to predict a rate of return. For example I have been on around 16% over the last 4 years or so since I transferred to a SIPP. If I got a return of 0% over the next 6 years (entirely possible) this would turn into an annual rate of about 5.5% over the whole 10 years.

Twointhebush

Brynsam wrote: »

Why are you telling her that (serious question!)? To encourage her to save more, to 'justify' a transfer from a DB to a DC arrangement...?

That's a perceptive question. She's about to inherit some money and I think it's a good idea to put as much of it in her SIPP (etc.) as possible. My argument being that she should plan to spend some of the income from the inheritance, rather than from the inheritance itself.

I've been saying up to 5% = up to £5000 return from £100000 invested, as an easy illustration of what might be expected and also to point out how much we need for a comfortable retirement. I don't know about anyone else but a mere £5k for every £100k, scares me nearly to death!

We both go for balanced risk.

Linton

Twointhebush wrote: »

That's a perceptive question. She's about to inherit some money and I think it's a good idea to put as much of it in her SIPP (etc.) as possible. My argument being that she should plan to spend some of the income from the inheritance, rather than from the inheritance itself.

I've been saying up to 5% = up to £5000 return from £100000 invested, as an easy illustration of what might be expected and also to point out how much we need for a comfortable retirement. I don't know about anyone else but a mere £5k for every £100k, scares me nearly to death!

We both go for balanced risk.

More scaryness.... 5% may be reasonable if you want a fixed return. However you could be retired for 30 years and so inflation adjusted income may be more appropriate. In that case you could be talking about 3.5% income as some of the investment gains need to be reserved to provide the inflation increases in the future.


The problem with investing is that average returns rarely happen, they are often much better than average or much worse. If you invest in such a way to seriously dampen down the volatility your average return will fall.

[Deleted User]

5% real return on a balanced portfolio is quite modest by historic standards (assuming you can keep the charges low). As for the future... Who knows?