What Return Assumptions Should You Use When Planning for FI?

Every financial freedom calculator asks for an 'expected annual return.' The number you enter has more impact on the result than nearly any other input — and most people enter it without a thought.

The big distinction: real vs nominal

Nominal returns include inflation. Real returns are inflation-adjusted. The US stock market's long-run nominal return is ~10%, but inflation eats roughly 3% per year, leaving a ~7% real return. For FI planning, real returns are the right number to use — because your expenses will also rise with inflation.

Defensible numbers for common allocations

• 100% US stocks (S&P 500) — 6–7% real
• Global stocks (VT-style) — 5.5–6.5% real
• 60/40 stocks/bonds — 4.5–5% real
• 40/60 stocks/bonds (near retirement) — 3.5–4% real
• 100% bonds (rare) — 1.5–2% real

Why conservatism is your friend

Plan with a slightly conservative assumption. The downside of using 6% and hitting 8% is that you reach FI two years early. The downside of using 9% and hitting 7% is that you retire and find out the math was off — at exactly the wrong time.

Sequence of returns risk

Long-run averages hide a critical detail: when the returns happen. A 7% average that's down 30% in the first year of retirement is far more damaging than the same 7% with a strong first year. This is why many planners use 5–6% during accumulation and stress-test with even lower numbers for the years just before and after the FI date.

What to do in the calculator

Run three scenarios in the Financial Freedom Calculator: pessimistic (5%), realistic (6.5%), optimistic (8%). The realistic number is your plan. The pessimistic number tells you whether you have a problem if returns disappoint. The optimistic number is celebration territory.

Plan with conservative returns. Live with realistic ones. Celebrate optimistic ones.