‘Absolutely nuts’: Expert slams Suze Orman and Dave Ramsey’s 12% returns claim, says they're missing TWO factors that eat away at your investments. Here’s a more realistic rate of return

But David Blanchett, head of retirement research at PGIM DC Solutions, told CNBC the financial pundits’ 12% figure is “absolutely nuts.”

Here’s why — and what returns you should be shooting for with your retirement savings.

How did they reach 12%?

Orman and Ramsey haven’t just plucked the 12% figure out of thin air. It stems from the historical average annual return of the S&P 500 (with dividends reinvested).

Ramsey's website cites a New York University dataset which says the S&P 500 average annual return from 1928 to 2023 was 11.66%. Over a shorter period of time, from 2014 to 2023, it was as much as 12.98%.

But it’s important to note that these figures are the arithmetic average, not the geometric average. The latter is what most investors prefer to use and they're lower.

So, the S&P 500 geometric average annual return for 1928 to 2023 was 9.8% and for 2014 to 2023 was 11.91%.

Remember, these are just averages. When you home in on some of the specific year-to-year returns, the market can look more bumpy. In the last decade, the S&P 500 declined in value in two years — 2022 and 2018 — but came roaring back during the years that followed.

This is all to say it’s important to invest with a long-term mindset and avoid trying to time the market. Panic selling could cause you to lose out on significant returns.

Read more: Generating 'passive income' through real estate is the biggest myth in investing — here’s how you can do it in as little as 5 minutes

Why is 12% ‘absolutely nuts’?

Blanchett’s big bugbear with personal finance pundits throwing around this 12% figure is that it does not account for volatility or annual inflation, which averaged at around 3% from 1926 to 2023. He prefers the geometric return, but even that is not sufficiently accurate because it doesn't account for inflation.

If you were to move beyond a simple arithmetic average to a calculation that incorporates the impact of volatility and inflation, Blanchett wrote that “7% is a more accurate historical estimate for an aggressive investor (someone primarily invested in stocks), and 5% would be more appropriate for someone invested in a balanced portfolio of stocks and bonds.”

Factor in fees (most mutual funds or ETFs have an expense ratio fee), taxes (for interest earned or capital gains) and asset allocation, and even the 7% figure looks too optimistic to him.

In Orman’s defense, she explained to CNBC that her 12% comment was to teach young investors about the power of compounding and encourage them to start investing early, not tell them what to expect. As for how much retirement savers should actually expect to earn on their investments, Orman suggested a more conservative return of 4% to 5%, “because you never know what can happen in life.”