Vanguard and Fidelity Expect Less Than Half the Stock Returns of the Past Decade. Here’s the Math for a 66-Year-Old With $2 Million and $4,000 a Month in Social Security.

Vanguard and Fidelity now expect American stocks to earn about 5.8% a year, and for a 66-year-old with $2 million that forecast is worth more than $1 million less at 76 than the 10% a year a generation of retirees planned on.

Vanguard’s return forecast page, updated Oct 21 from its Sep 30 model run, puts U.S. stocks at 4.8% to 6.8% a year for the next ten years. Fidelity’s research team, working on a 20-year horizon, expects 5.8% a year before inflation and 3.2% after it. The S&P 500 fund returned 15.2% a year with dividends reinvested over the ten years to Friday, so both firms are calling for less than half of that pace. Vanguard also puts U.S. bonds at 5.1% to 6.1%, within two tenths of a point of its stock midpoint.

Two forecasts from two of the largest managers of retirement savings in the country, landing on the same number, read as a warning to anyone whose plan still assumes 10% a year from stocks. They are also only forecasts: Vanguard’s own range moved up 0.6 point in a single quarter, from 4.2% to 6.2% as of June 30, and neither firm claims to know the order the years will come in.

Take a 66-year-old retired engineer and his wife, 63. They have $2 million: $1.4 million in a rollover IRA, $450,000 in a brokerage account and $150,000 in a Roth. Social Security pays them $4,000 a month, $48,000 a year, which covers 44% of the $110,000 they spend. The other $62,000 comes out of savings, a 3.1% withdrawal rate. Their plan, like most plans, and probably like yours, was built on the long-run average of about 10%. Here is what the new numbers do to it.

Ten years of $2 million at each return

Each year the $62,000 comes out first, rising 2.5% a year in line with Vanguard’s core inflation forecast for 2027, and the rest earns the return. The table shows the balance at 76.

At 10% the couple reaches 76 with about $4 million after taking out $694,610 along the way. At 5.8% they reach it with $2,566,012. That is $1,426,920 less, more than $1 million, with the same spending and the same starting pile. Against the past decade’s pace the gap is about $4 million. None of it is money they have lost. It is money the old assumption said they would have, for a long-term care bill, a second home or the kids. If your own plan was built on 10%, the same gap is sitting in your spreadsheet.

The 4% rule survives the forecast

The question you ask next is whether the money runs out. It does not, at any withdrawal rate this couple is likely to use. At 5.8%, the $62,000 draw rising with inflation lasts more than 60 years. The 4% rule, $80,000 a year on $2 million, lasts 48 years at 5.8% and 36 years at Vanguard’s floor of 4.8%. Even $100,000 a year, a 5% rate, lasts 31 years at the midpoint and 27 at the floor, which takes the younger spouse to 90.

The 4% rule you have heard about for 30 years was built on U.S. market history that averaged about 10% a year with some terrible decades inside it. A steady 5.8% is a kinder path than several of the ones that history contains, as long as the first years are not the bad ones. What the forecast changes is the ceiling on your spending and the size of what you leave behind.

Bonds now cost almost nothing

The quieter number in Vanguard’s table is the one for bonds: 5.1% to 6.1% a year, a midpoint of 5.6% against 5.8% for stocks. A decade ago you paid for safety with return. Under this forecast a 60/40 mix of stocks and bonds has an expected return of 5.72% at the midpoints, 0.08 point under all stocks. On the couple’s numbers the two paths end up $22,363 apart at 76, $2,543,649 against $2,566,012.

What the 40% buys you is Thursday. The S&P 500 fund fell 4.4% in one day on Nov 5 and closed Friday 5.6% under its Oct 6 record. On $2 million held entirely in stocks, Thursday cost $88,184. With 60% in stocks and the bonds flat, it cost $52,910, which spared $35,273. The $800,000 bond side is 12.9 years of the $62,000 draw, and at the current 4.17% three-month bill rate it earns $33,360 a year on its own, more than half of the gap Social Security leaves. You give up eight hundredths of a point of expected return and never have to sell stocks in a year like this one.

What to change, and what to leave alone

First, the assumption. If your spreadsheet still compounds at 10%, change it to 6% and look at the balance at 76 and at 86 again. Most plans built on a 3% to 4% withdrawal rate survive the change. The number that moves is what is left over.

Second, the mix. With bonds forecast within two tenths of a point of stocks, there is little reward left for holding more stock than your spending needs, and the bond side is where the withdrawals come from in a bad year. Keep it in Treasuries or a short-term bond fund inside the IRA, since that is the account the $62,000 comes out of, and the interest is sheltered there until it is withdrawn.

Third, leave the spending alone. The couple’s 3.1% rate works at 4.8%. Cutting it because of a forecast would be paying today for a decade that may not arrive. Social Security does its share quietly: the 3.6% cost-of-living increase for 2027 takes their $48,000 to $49,728, or $4,144 a month, with no forecast attached.

Where this is weak

Forecasts are ranges, and Vanguard publishes its forecast as a range for a reason you should keep in mind: the middle of the model has been wrong before, and the range moved 0.6 point in a single quarter. A steady 5.8% is an average, and an average is a different thing from a path; two bad years at the start do more damage than the table shows, which is the reason for the bond side. The table leaves out taxes on the IRA withdrawals and assumes the draw rises exactly 2.5% a year. Social Security and the $110,000 of spending are the story’s assumptions, so plug in your own gap. Fidelity’s number covers 20 years and Vanguard’s ten, so the two cannot be stacked on top of each other exactly; they happen to agree at 5.8%.

The bottom line

Vanguard and Fidelity expect U.S. stocks to earn about 5.8% a year, less than half the past decade’s 15.2%. For a 66-year-old with $2 million drawing $62,000 a year, that is $2,566,012 at 76 rather than about $4 million, a gap of more than $1 million, and the money still lasts past 90 at any rate up to 5%. The bigger change is the price of safety: with bonds forecast at 5.6%, a 60/40 mix gives up $22,363 over ten years and spares $35,273 on a day like Thursday. Change your assumption, keep your spending, and let the bond side do the selling in the bad years.

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