Estimating Future Investment Returns: 30-Year Forecast

It’s very hard to estimate exactly how much we’ll have to save for retirement, as that would require knowing how much our investments will grow in the future. Even if we try to do long-term trends, this can be difficult. But Richard Ferri, author of All About Asset Allocation and founder of Portfolio Solutions, LLC has done his best by layering risk premiums to estimate market returns. You can find the article for free online – ‘Portfolio Solutions 30-year Market Forecast’. An excerpt:

At the end of each year, we analyzed several economic and market risk factors including Federal Reserve forecasts, inflation forecasts derived from inflation protected securities, and the volatility of asset classes, styles, and categories. From that data, we developed estimates for longterm future returns.

Here are some of the results:

Asset Class and Category Estimated Total Return Less Estimated Inflation Equals Estimated Real Return
T-Bills 3.5% 3% 0.5%
Intermediate Treasury Notes 4.5% 3% 1.5%
Intermediate High-Grade Corporate Bonds 5.0% 3% 2.5%
US Large Cap Stocks 8.0% 3% 5.0%
US Small Cap Stocks 9.0% 3% 6.0%
US Small Cap Value Stocks 10.0% 3% 7.0%
REITs 8.0% 3% 5.0%
International Developed Country Stocks 8.0% 3% 5.0%
International Small Country Stocks 9.0% 3% 6.0%
International Emerging Country Stocks 10.0% 3% 7.0%

Let’s use this information to estimate roughly the expected long-term total return of my portfolio:

40% Large Cap x 8% = 3.2%
20% Small Cap x 9% = 1.8%
10% REIT x 8% = 0.8%
10% International x 8% = 0.8%
10% Emerging Markets x 10% = 1%
10% Intermediate Bonds x 5% = 0.5%
Total……………………………… 8.1%

That’s about how much I’ve been estimating it at. Be wary of other models and simulations that estimate future overall returns of 11+%, as there are many indications that returns in the future won’t be as high as the past few decades. As the article states, these numbers err on the conservative side, which is fine by me.


  1. Good article. The standard deviations he provides are useful.

    For planning purposes I don’t think it makes sense to deduct inflation from the return. That can really mess things up unless you adjust everywhere else in your model for taxes and inflation effects on your principal value, etc.

    That being said, I think your 8.1 + 3 = 11.1 is a tad bit high.


  2. Very interesting analysis.
    Have you had a chance to examine his underlying methodology?


  3. Jonathan-

    First, your blog rocks. I check it every day.

    Have you considered DFA funds? To access them, you need to meet a minimum balance requirements ($100k) and pay an advisor fee, but they have index funds that historically do better than Vanguard’s funds. They also have a more asset classes such as international small cap value. I’m hoping to switch over once I meet the minimum account balance. An advisor that uses these funds is what turned me onto index investing in the first place. ( It is an awesome website. I’m interested in what you think.

    Also, I agree that our future returns probably won’t be as high as they have been the past few decades (mean reversion, ect). It a harsh reality. Even if we are wrong it’s still better to err on the side of conservative side.

  4. The 8.1% is the total estimated return, as you suggest. Taking out inflation would be 5.1% real return.

    The underlying methodology of adding risk premiums is something that I’ve seen before, but as with everything it’s the data that makes all the difference. I’m trusting Ferri to use good data, which I think is a good bet.

    I’ve written DFA Funds before, and also IFA. I used their portoflio risk/return data in modelling my portfolio. But I definitely don’t have the bling to meet the minimums for an advisor.

    After that, I’ll be doing a cost-benefit analysis for access. I really don’t want to pay them 1% of my portfolio just to pick an asset allocation and access to the funds.

  5. Jonathan first the “DFA funds before” is dead/wrong link.

    I’m also wondering where he’s getting his data from as when most refer to large cap and he’s not saying large cap value or large cap growth, so I’m pretty certain he’s referring to the S&P500, well for the past 20 years it’s returned around 12% and I do agree that we most likely won’t see the same returns we have lately, but there are those that argue we are more likely to see returns from the past 10, 20 or 30 years than data that goes back say 80 years.

    Also anybody correct me if I’m wrong, but I’m trying to follow the formula and you cannot add percentages. It’s simple as if you take 100k and you loose 10% and you gain 10% you are not back at 100k
    100k minues 10% equals 90k and if you make 10% you are at 99k not 100k.

    Another example is that everyone does the math wrong when they speak about inflation. This is completely wrong when you say I made 10%, but I lost 3% to inflation so I only made 7%. Once again you cannot add and subtract percentages. When you subtract 10% from 3% it’s actually about 6.7% NOT 7%, close enough for most people I guess.
    Here’s the math if someobdy is confused 10% minus 3% is 1.1/1.03 =1.0679 so if you really want to round up it’s 6.8%, but NOT 7%. Therefore the computation that was provided isn’t making sense to me. It’s close, but not accurate.

    I tried plugging in some popular portfolios and they were really off, by what they returned historically. I believe the coffeehouse portfolio for instance showed a return around 7% and for the past 15 years it’s returned around 11%. When people speak about us not getting the equity returns we once did, I don’t believe that a return that was getting 11% will now become reduced by about 4%. I think the returns might be reduced by 1-2%.

  6. Anton:
    I forgot to ask, how much does IFA charge for 100k minimum? I’ve seen a lot of debate on vanguard versus DFA throughout the years, but a lot of the extra return is taken away by the associated fees.
    I know Paul Merriman’s Merriman capital charges 1% for anything under 500k, therefore the added percentage isn’t worth it for me. What does draw me towards DFA is the added funds as you have mentioned that vanguard doesn’t have like small value international and even international bonds. Vanguard is added index funds though and they have two midcap index funds that just came out.

  7. J,
    I think you are misunderstanding what he is doing.

    He is deriving his returns by coming up with “premiums”, one of which is inflation.

    Don’t subtract inflation if you are using his future gains numbers. Using his figures you can expect an 11.1 return in your portfolio, not 8.1 (or 5.1) as you suggest.


  8. J, That brings up a good blog topic. Inflation and how to calculate it.

    Make sure everyone understands it and is using it in there calculations. For example, if you expect 3% annual inflation, and you expect to retire in 20 years with an income of 75k 2006 dollars, you will actually need to be withdrawing about $140k. (A 2006 dollar will have $0.55 of 2006 buying power, or $1 of 2006 goods will cost $1.81, if my math is right)…


  9. Guessing at getting future returns of somewhere between the past 30-year average and 1-3% less (say -2%) is probably as good a guess as any. So I’d guess around 9% for the equities portion and I use around 8% for my property assets in Sydney – you’d have to get a localised estimate for your property returns. (rent + capital gains- costs)

    I count all assets in my total portfolio – so I have way too much property (my house plus a rental property I bought before the last Sydney property boom) – but I also use a lot of gearing. I therefore allow for the incremental gain in average return on my equity due to use of gearing (around 80% to start for property purchases, paid down over 20 years, and I plan on maintaining my equity gearing at around 50% until I retire).

    Assuming you can get loans at around inflation (3%) +4% for home/property secured loans (say 7% total on a variable rate P+I loan), and have to pay 1% more for margin loans, you can easily project a total average return for your portfolio of around 8.5% + 0.5x(8.5%-7.25) = 9.1%

    Anyhow, my current net worth is already close to what I could retire on if I really had to (even ignoring the fact that if I did suddenly have to retire some of my income protection would presumably kick in), so projected future returns are fairly academic.

    My advise is to not worry about whether you’ll average 8% or 9% (or 7%) – just invest in your further education to boost future earnings and hence savings rate, and live like the millionaire next door, not the Joneses!

    ps. I you’re paying off a mortgage and saving 10-20% of your earnings while working, your projected retirement needs tend to be quite modest.

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