Investors Expect Long-Term Returns of 15.3%. Here's the Reality All Retirees Need to Keep in Mind

Optimism is a good thing, but too much of it can wreak havoc on your retirement plan.

What if I told you that you could go from $0 to $1 million in 30 years while only investing $170 per month? It sounds pretty great, especially for workers who weren’t able to save much, if anything, in the first decade of their careers. But there’s one tiny problem with this example: It’s way too optimistic.

In order to pull this off, you’d need to earn an impressive 15.3% average annual return. A recent Natixis survey reveals this is what many Gen X workers expect they’ll earn. But the reality isn’t so rosy. Below, we’ll talk about more reasonable expectations and how to adjust your retirement plan accordingly.

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Too much optimism can be dangerous

The Natixis survey found that American Gen X workers had the largest expectation gap of all countries surveyed when it comes to investment returns. Though they hope to earn 15.3% returns above inflation over the long term, the reality is closer to 7%. This is less than half of what they were anticipating.

It might not be what you want to hear, but it’s crucial that you revise your expectations so you don’t come up short in retirement. Returning to our initial example of saving $170 per month for 30 years, you’d wind up with just $198,807 if you earned a 7% average annual return during that time. Even with Social Security, that probably won’t be enough to cover all of your expenses.

If you want to live as comfortably as possible, you need to increase your retirement contributions to align with a more realistic rate of return. If you still hope to save $1 million over 30 years, you’d have to save about $856 per month, assuming a 7% average annual return. That’s a lot tougher for the average person to pull off.

How to adjust your retirement plan

If you realize you’ve been overly optimistic about your investment returns, it’s crucial that you correct this as soon as possible. To start, figure out the current balance of all your retirement accounts. Then, use a retirement calculator to figure out how much you must save monthly to actually reach your long-term goals.

Ideally, you’d have extra cash you could earmark for retirement, but that’s not the case for a lot of people. You first need to find money to set aside. There are two ways to approach this: reducing expenses and increasing your income.

Reducing your expenses could look like canceling unused subscriptions or cutting discretionary spending. Increasing your income could involve things like finding a better-paying job or starting a side hustle. You could also try a combination of both.

When this isn’t enough, you may have to think about increasing the length of time your retirement savings are invested before you withdraw them. This usually means delaying retirement to give your investments more time to grow. It’s not ideal, but it’s very effective.

Say you hope to save $1 million by your initial retirement date in 30 years, but you don’t have the $856 per month you need to reach your goal, assuming a 7% average annual return. You can only come up with $500 per month. If you delay your retirement by a little over seven years, you can still reach your $1 million goal. You may not even need to wait that long given that working longer also reduces the length and cost of your retirement.

It’s never easy to be in a situation where you’re not able to save as much as you’d like for the future. But the sooner you take steps to address the problem, the easier it’ll be to get yourself back on track. Do the best you can right now, and check in on your progress every year (or whenever you experience a major life change) to ensure you’re contributing enough.

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