Investing basics

What's a Reasonable Rate of Return to Expect From Investing?

Almost every financial independence calculation depends on a single assumed number that most people never actually examine: the rate of return their investments will earn between now and whenever they plan to stop working. Pick a number that's too optimistic and the whole plan quietly understates how much you need to save. Pick one that's needlessly conservative and you might delay a decision you could have made years earlier. There's no single correct answer, but there is a reasonable range — and understanding where it comes from matters more than memorizing the number itself.

What "the market" has actually returned, historically

Broad U.S. stock market indexes have, over long historical stretches spanning many decades, returned somewhere in the neighborhood of 9-10% a year on average before adjusting for inflation. That figure gets repeated so often it starts to sound like a guarantee, which it isn't — it's a backward-looking average across a specific, and unusually long, historical period. Some multi-decade stretches beat it comfortably; others fell well short. Past returns describe what happened, not what has to happen again, and a reasonable planning assumption should treat that average as one data point rather than a promise.

Nominal vs. real returns — the adjustment that actually matters

The 9-10% figure above is a nominal return — it doesn't subtract inflation. Since inflation has historically run somewhere around 2-3% a year over the long run, the real, inflation-adjusted return on a broad stock portfolio has historically been closer to 6-7% a year. That distinction matters enormously for financial independence math, because your future expenses will also rise with inflation — so the return that actually determines whether your portfolio keeps pace with your spending is the real return, not the nominal headline number. Plenty of FI plans quietly overstate their own progress by running the math in nominal terms while planning expenses in today's dollars.

Average vs. typical: why the sequence matters, not just the average

An average return smooths over a lot of very different lived experiences. A portfolio that returns 20%, then -10%, then 8%, then 12% doesn't behave the same way in practice as one that returns a steady 7.5% every year, even though the two can average out to a similar number — the order and size of the swings matter enormously, especially for anyone withdrawing from the portfolio rather than only contributing to it. This is part of why the 4% rule was tested against real historical sequences of returns rather than a single flat average — a portfolio that has to sell shares during an early downturn behaves very differently than one that gets a few good years first, even if the long-run average return ends up identical.

The number should change depending on what you actually hold

A "reasonable rate of return" isn't one universal figure — it depends heavily on the mix of assets producing it. A portfolio concentrated in broad stock index funds has historically earned more, on average, than one blended with bonds or cash, but it has also swung much harder in bad years. A portfolio built around dividend-focused holdings may trade some long-run growth for more predictable current income. None of these are wrong choices — they're different trade-offs between expected return and how much volatility you can tolerate along the way — but plugging a single generic number into your plan without accounting for what you actually hold can make the projection more precise-looking than it really is.

Fees and taxes quietly pull the realized number down further. A fund charging even 1% a year in fees isn't just losing you 1% of that year's return — it's shrinking the base that every future year of compounding gets calculated on, which is why cost matters as much as the headline return you're assuming. Taxes owed along the way have a similar effect, and how a given income stream gets taxed is worth understanding before assuming a stated return is the return you'll actually keep.

What a sensible planning assumption looks like

Because the future doesn't have to resemble the past, and because sequence risk means the average alone doesn't tell the full story, many long-term financial planners lean toward a somewhat conservative real return assumption for a diversified stock-heavy portfolio — often somewhere in the 5-7% range after inflation, rather than assuming the top end of historical averages will simply repeat. Being conservative in the assumption doesn't mean expecting worse outcomes; it means building a plan that still mostly works if the next few decades happen to run a little below the historical average, rather than one that only works if they run right at it or above it.

• Use real (inflation-adjusted) returns — it keeps your assumed growth rate consistent with expenses you're also planning in today's dollars.
• Match the assumption to your actual mix — an all-stock portfolio and a stock-and-bond blend don't share the same reasonable number.
• Subtract what fees and taxes will actually take — the return you keep is what funds your plan, not the return the fund reports.
• Re-run the math at a lower number occasionally — if the plan still basically works a point or two below your assumption, it's on sturdier ground.

"The point of a rate-of-return assumption isn't to predict the future. It's to keep the plan honest about how much of it is actually guesswork."

What this means for your RatRace Score

Your assumed rate of return doesn't show up directly in your RatRace Score — the score itself is a measured ratio, not a projection:

RatRace Score = Monthly Passive Income ÷ Monthly Expenses

But the return you assume your portfolio will earn quietly shapes every projection of how that ratio will move over time — how fast the Snowball Effect compounds your assets into spendable income, and how long it takes before the numerator catches up with the denominator. A realistic assumption doesn't change what's already true about your finances today, but it keeps your sense of what's coming grounded in something closer to reality. That's also why tracking the actual number every month matters more than trusting any single projection to be right — the tracked number tells you when your assumption needs revisiting.

The takeaway

There's no single correct rate of return to plug into a financial independence plan, but there is a reasonable range — grounded in long historical averages, adjusted down for inflation, fees, and taxes, and matched to whatever mix of assets you actually hold rather than a generic headline figure. Treat it as a working assumption you revisit occasionally, not a fact you calculate once and forget, and your plan will hold up a lot better against whatever the market actually does next.

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