What Growth Rate Should You Use for Retirement Planning?
When you type numbers into any pension or retirement calculator, one input quietly decides almost everything: the annual growth rate. Nudge it from 5% to 7% and your projected pot can double. So the honest answer to “what growth rate should I use for retirement planning?” is: a realistic one, tested across a low, middle and high scenario rather than a single hopeful figure. This guide shows you how to pick that number, what conventions the UK and US industries use, and exactly how much the choice changes the result.
This article is general information, not financial advice. Investment returns are never guaranteed, and past performance does not predict the future. For a plan tailored to your circumstances, speak to a regulated financial adviser.
Nominal vs real returns: the first decision
Before choosing a percentage, decide whether you are working in nominal terms (before inflation) or real terms (after inflation). This matters more than the exact rate you pick.
A nominal projection shows the actual pound, dollar or euro figure you might see on a statement in the future. A real projection shows what that money would buy in today’s prices. Because inflation slowly erodes spending power, a large-looking future pot can be worth far less than it seems. If you assume 3% inflation a year, prices roughly double every 24 years, so a projected fund needs deflating to be meaningful.
The simplest approach for most people: plan in real terms. Pick a return net of inflation, and every figure your calculator shows is already in today’s money. A common cautious real-return assumption for a mixed portfolio is around 2% to 4% a year. If you prefer nominal figures, add your inflation assumption back on top — for example, a 4% real return plus 3% inflation is roughly a 7% nominal return.
What return can you actually expect?
Your realistic rate depends on how your money is invested. Broadly:
- Mostly equities (shares): higher expected long-run return but big year-to-year swings. Global shares have historically delivered something in the region of 5% a year above inflation over multi-decade periods, though no future is promised.
- Balanced mix (shares and bonds): a middle path, often assumed at roughly 4% to 5% nominal, or 2% to 3% real.
- Cautious or near retirement: more bonds and cash, lower expected growth, typically 2% to 4% nominal.
Two forces drag the figure down, and both are easy to forget. The first is fees. A platform and fund charge of 1% a year turns a 7% gross return into 6% net. The second is inflation, already covered above. Always subtract charges before you plug a number in, because the calculator does not know what your provider charges.
Regulators nudge providers toward realism. In the UK, the Financial Conduct Authority requires pension illustrations to show a range of growth scenarios rather than one optimistic number, and product providers must justify their assumed rates. In the US, the SEC and FINRA warn against projecting past bull-market returns indefinitely. The shared message: use a range, and lean conservative.
A step-by-step method to choose your rate
Here is a repeatable method you can apply in five minutes:
- Choose nominal or real. Real (after inflation) is easier to interpret because the answer is in today’s money.
- Match the rate to your investment mix. Heavier in shares, aim higher; heavier in bonds and cash, aim lower.
- Subtract fees. Take off your total annual charge, typically 0.3% to 1.5%.
- Subtract inflation if working in real terms. A 2% to 3% inflation assumption is common for the UK and US.
- Run three scenarios. Model a low, middle and high rate so you see a range, not a single guess.
- Review yearly. Update the figure as markets, charges and your mix change.
Worked example: the same pot at three growth rates
Take a saver aged 35 with a current pot of £20,000, adding £300 a month until age 65. That is 30 years, and total contributions of £20,000 plus £300 × 360 months = £128,000 paid in. Everything above that figure is investment growth. Using monthly compounding, here is how the final pot changes with the assumed annual return:
| Assumed annual return | Projected pot at 65 | Of which growth |
|---|---|---|
| 3% | £224,000 | £96,000 |
| 5% | £339,000 | £211,000 |
| 7% | £528,000 | £400,000 |
The same contributions produce a pot that more than doubles between the cautious and optimistic assumptions. That gap is exactly why a single guess is dangerous: pick 7% and plan your whole retirement around £528,000, and a real-world 5% leaves you nearly £190,000 short.
Now show the fee effect. If that 7% is a gross return and you pay a 1% annual charge, you actually earn 6%. Re-running the same example at 6% gives a pot of about £422,000 — roughly £106,000 less than the 7% figure. A single percentage point of charges, compounded over 30 years, quietly removes a six-figure sum.
And the inflation reality check. That £528,000 at 7% is a nominal figure. With 3% inflation over 30 years, prices rise about 2.4 times, so £528,000 in 2056 buys roughly what £218,000 buys today. Big future numbers shrink once you translate them into real spending power — another reason many planners simply work in real terms from the start.
US and euro versions of the same sum
The method is currency-neutral. A US saver contributing $500 a month into a 401(k) or IRA on a $30,000 starting balance, at 7% nominal over 30 years, ends up with roughly $853,000 before fees and before the same inflation haircut. A euro-zone saver running €400 a month on a €25,000 start at 5% reaches about €390,000. Swap the currency symbol, keep the logic: choose a rate that fits your investments, strip out charges, and read the answer in today’s money.
UK savers should also remember the State Pension and any employer contributions sit on top of these projections, while US savers can factor in Social Security and employer 401(k) matching. Tax treatment differs too — UK pensions get HMRC tax relief on contributions, US 401(k) and traditional IRA contributions are typically pre-tax — but neither changes the growth-rate logic, only how much lands in the pot each month.
Frequently asked questions
Is 7% a safe growth rate to assume?
Seven percent is a plausible long-run nominal return for a mostly-equity portfolio, but it is not safe as a sole planning figure. It ignores fees and inflation, and real returns vary hugely decade to decade. Use it only as your optimistic scenario alongside lower ones.
Should I use a lower rate as I get older?
Usually yes. Many people shift toward bonds and cash as retirement nears to reduce risk, which lowers the expected return. It is sensible to reduce your assumed growth rate to match that more cautious mix in the final 5 to 10 years.
What inflation rate should I pair with a nominal return?
A 2% to 3% assumption is a reasonable default for the UK and US, broadly in line with the Bank of England and Federal Reserve long-run targets. If you work in real terms instead, you skip this step because inflation is already removed.
Put your own numbers in
The safest habit is to test a range rather than trust one figure. Try a low, middle and high growth rate in our pension and retirement calculator and compare the pots side by side, exactly as in the table above. To see how monthly contributions and compounding build over time in more detail, the savings and compound interest calculator is a useful companion, and if you are working out how much you can afford to put aside each month, start with the budget and expense calculator. Whichever rate you choose, revisit it once a year — a five-minute check that keeps your retirement plan grounded in reality rather than hope.
Reminder: this is general information, not personalised financial advice. Investment values can fall as well as rise. Consider speaking to a regulated adviser before making decisions.