When planning your financial future in Naperville, it’s a good idea to keep your rate of return in mind - and more specifically, what rate of return to use for retirement planning. Let’s start with the basics: What is a rate of return? It’s the percent change in the value of your investment. If your rate of return is 5%, that means your investment grew by 5% in that year before inflation.
So, what rate of return should I use for retirement planning and what inflation rate should I use for retirement planning around Plainfield? Many investors assume a rate of return between 6 to 10 percent, along with an inflation rate of 2 to 3 percent. But with so many factors affecting your investments in this day and age, it’s best to break them down individually.
Factors That Affect Your Rate of Return
- Risk Tolerance: Young investors have greater risk tolerance, so they can invest more aggressively to chase a larger rate of return. As you near retirement, your risk tolerance shrinks and you’ll likely shift to more stable investment options.
- Investment Types: Different investments have their rates of return. Everything from stocks to bonds to life insurance to precious metals can add value to your retirement, but all of these investments affect your income differently.
- Fluctuations: Some investments are more volatile than others, and even historically reliable options like the S&P 500 can take major dips. That’s one reason that diversifying your assets can keep you safer over time.
- Annualize vs. Compounding: Your rate of return will also change when you move from retirement planning to retirement. Retirement planning often involves compounding returns, which means your returns are reinvested to help your sum grow exponentially. In retirement, the money will not grow at the same rate - so you’ll need to plan for that.
How to Maximize Rate of Return
- Adjust for Inflation: Consider retiring to a place with a lower cost of living to fight the inflation rate, and compare income and state taxes between different locations.
- Buy Bonds: Bonds can be a lower-risk investment that adds major value to your portfolio. Try options, such as short-term bonds that mature in less than five years or inflation-linked bonds like Treasury Inflation-Protected Securities (TIPS).
- Diversify your Portfolio: Dividing your funds among several asset classes is a great way to reduce risk while potentially skyrocketing your growth.
- Stash Cash: While most of your money will remain invested, many experts recommend keeping up to two years worth of expenses in cash just in case.
Plan For Your Future with IntentGen
We’ve gone over the basics of figuring out what rate of return to use for retirement planning, but there’s plenty more to discuss. Whether you’re interested in early retirement or investment strategies, we'll help you explore your options at IntentGen. Contact us today to get one step closer to your financial goals!