No one can predict the future, but when making projections for things like retirement planning, what investment return should you expect?
What do we mean by “investment return?”
Before we get into the numbers, we need to go through a few definitions.
Nominal returns vs. real returns
These are just fancy words for before-inflation and after-inflation returns. Real returns (after-inflation) returns are equal to the nominal returns (before-inflation) minus the inflation rate. Real returns is a better metric than nominal returns in retirement planning. If you use nominal returns, then you have to adjust your projected spending in retirement by the inflation rate.
The importance of dividend reinvestment
When using historical data to estimate past investment returns, it’s easy to fall into the trap of calculating returns by just dividing the final price by the original price. For example, the S&P 500 traded at 2733 in June 2018, while it traded at 100 in June 1968. You might naively assume that someone who invested in the S&P 500 in 1968 made a 2633% return on their money over 50 years.
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