Welcome to today's video.
What rate of return should I
be using for retirement
planning?
This is really key.
We want to get this number
right so that we don't have to
continue to invest even
longer.
By the end of this video,
you'll have the knowledge you
need in order to determine the
rate of return you should be
using for retirement planning.
So let's dive right in.
All right,
I'm going to go over the
different factors to consider
when you are determining your
rate of return for retirement
planning.
And I'm even going to share
the rate that I personally
use.
Not only that,
I'm going to show you a
calculator so that you can see
the difference in using a
lower rate versus a higher
rate.
All right.
The first thing we want to
consider when we are
determining our rate of return
to use during retirement
planning is what we are
invested in.
If we are invested in stocks,
that is going to give us a
higher return.
And if we are invested in
bonds,
that is going to give us a
lower return.
So this is really critical
when you are determining your
rate of return number.
A lot of people will just say,
oh,
use 10% rate of return.
But if you're investing all in
bonds,
there is no way you're going
to get a 10% rate of return.
So this is a really critical
factor to consider when you're
determining that rate.
And we also want to factor in
inflation.
I know that recently we have
seen really high rates of
inflation and other years have
been a lot lower.
So we want to take this into
consideration when we are
determining our rate of return
for our retirement planning.
We also want to consider our
time horizon.
How long are we going to be
investing before we actually
retire?
Is it going to be five years?
Is it going to be 30 years?
We want to know exactly how
long that time horizon is
because that's going to make a
difference on our rate of
return.
If we are investing for a
longer amount of time,
then we're able to take on
more risk and get that higher
return.
But if it is a short amount of
time we are investing and we
decide to be super risky,
our investments could drop
within that short amount of
time,
and that would mean our rate
of return would also drop.
And we also want to be aware
of market conditions.
If we are investing during a
bull market,
we are going to see really,
really high returns.
If we are investing during a
bear market,
we are going to see lower
returns.
And this kind of goes along
with the time horizon because
if we have that longer time
horizon,
we're going to be able to go
through a bull market and a
bear market and another bull
market and another bear market
and be just fine.
But if we have that shorter
time horizon,
we may only be in the bull
market or the bear market.
So we want to be aware of
that.
So now that we know what
factors too at take into
consideration in order to
determine our rate of return,
what rate of return should we
be using?
If we are just investing in
stocks,
then the average return for
the stock market has been 10%,
but we don't want to just use
10% for our rate of return.
We want to take into account
inflation.
So on average,
I know recently it's been a
lot higher,
but on average it's a 3%
inflation rate.
So we can take that 10% and
subtract out that 3% and use a
7% return,
but we want to make sure that
we are investing only in
stocks.
If we have half in stocks and
half in bonds,
that 7% return is not going to
work for us.
And I feel like a lot of
people don't realize that
because they don't wanna be as
risky with their investments,
but they have to understand
that they are not going to get
as high of a return on their
investments.
In order to get that higher
rate of return,
we need to have that higher
risk associated with it.
And that's not just to say,
oh,
be super risky with all of
your investments,
we can still take calculated
risks and still see that high
return.
For example,
if you're putting all of your
money into just one company,
maybe you're putting all of
your money into Amazon,
that is going to be super
risky.
We want to make sure that we
have diversification within
our investments.
Even if we just choose to
invest in only stocks,
we can do a stock fund,
which has a whole bunch of
stocks or companies inside of
that one single fund.
So we're still diversified,
but we're still being risky
because we are only investing
in that stock fund.
So we can still expect to see
that higher rate of return.
And this is what I do.
I have the majority of my
money in one certain stock
fund,
and if you want to know which
one that is,
I have another video,
I'll leave a link above,
you can check it out later on.
And then I have a few
different individual stocks,
but I don't just have one
stock,
one company that I have all of
my money in.
That would be too much risk
for me personally.
And then going back to using
that 7% return,
some are worried that may be
too high of a rate of return
to use,
so they want to be more
conservative,
so they might use a five or 6%
return.
So you have to determine where
you feel comfortable along
with taking into account all
of those other factors that I
mentioned.
Because if we say,
oh,
I'm going to get a 10% return
on my money,
I only have to invest for 10
years.
And then when you get to that
10 years you did not receive a
10% return,
then you'll have to invest for
an extra amount of time.
I personally use the 7% rate
of return,
and I have heard of some
others using even 10% because
usually over time when you are
progressing in your career,
you're getting raises.
So you're actually investing
more of your money as you go
along.
And all of these calculators
out there allow you to just
enter in one certain number or
one certain amount.
You're going to be investing
every single month.
But honestly,
that could increase over time.
So a 10% return might feel
comfortable to you taking a
look at bonds and what they
have returned,
it could be around four to 6%,
but then we would have to
adjust for inflation.
So taking off 3% of that.
So it's barely above
inflation.
And I just want to show you
the Financial Samurai blog
post about investing a certain
percentage in stocks versus
bonds because if you are going
to invest a certain percentage
in stocks and bonds,
then you can't just use that
7% return or the 3% return.
There would need to be a
combination.
So just make sure that you
feel comfortable with
whichever rate of return
you're going to be using.
Because if you are investing a
certain percentage in stocks
and then a certain percentage
in bonds,
we want to adjust for that.
So we wouldn't want to be
using the full 7% return.
It would be a little less if
we are putting maybe 80% in
stocks and 20% in bonds.
And of course it is hard to
know the exact number to use
because we are looking at
historical data,
but that doesn't mean that is
what is going to happen in the
future.
For me personally,
I feel comfortable using that
7%,
but you may not feel
comfortable doing that,
especially if you're going to
be investing a certain
percentage in bonds.
So come up with the number
based on this data that you
feel is going to work best for
you.
And if you want help investing
in the stock market and
determining the number for
your rate of return,
I have a free masterclass on
how I can help you invest in
the stock market and figure
out all of these little
details like your rate of
return for your investments.
If you're interested in that,
make sure and click the link
below and watch the free
masterclass and tell me also
what rate of return are you
going to use.
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Thanks so much for watching.
I'll see you in the next
video.