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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 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 historical return, not the geometric average annual return. The latter is what most investors prefer to use and it’s lower.

So, the S&P 500 geometric 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.

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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.”

Meanwhile, the Ramsey Solutions team did not respond to CNBC’s request for comment. Their website still says a 12% annual return is “a pretty reasonable bet for your long-term investments” based on the history of the market. It also stresses “it’s your savings rate — the fact that you’re actually putting money into your 401(k)s and IRAs every month — that is most likely to help you have a successful retirement.”

Adjusting your asset allocation as you age

Most money experts agree that the earlier you can start investing and saving for retirement, the better.

Generally speaking, younger investors, with many years of earning ahead of them, can afford to take on more risk in their investment activities than older Americans, who will soon be relying on their investments as their only source of income.

Over time, as you progress towards your planned retirement, most financial advisers suggest adjusting your blend of investments to be more conservative. For instance, you could switch out stock investments for a mix weighted more toward bonds.

Bonds are generally considered to be less risky — and less exciting when it comes to returns (often in the low, single-digit percentage). The geometric average annual historical return on U.S. 10-year Treasury Bonds from 1928 to 2023 was 4.5%. This was well short of the S&P 500’s average, but still a nice steady income for retirees.

Blanchett suggests that “a decent target” for how much of your portfolio you should have in equities once you retire would be 110 minus your age. "So, at age 65, a 55% equity allocation is a reasonable starting place."

Understanding when to alter your investing strategy really comes down to your personal financial situation, your investments objectives, your tolerance for risk and your overall goals for retirement. If you’re not sure how to figure that out, consider working with a financial adviser who can help you map out a path you’re comfortable with.


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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.


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