The short answer
Over long periods, broad U.S. stock indexes have historically produced returns that many people summarize as “around 10% per year” (nominal, before inflation). But that number is an average — and real life rarely matches the average in any single decade.
What does “average return” mean?
There are multiple “averages.” If you don’t know which one someone is quoting, the number can mislead you.
Arithmetic average
This is the simple average of yearly returns. It often looks higher, but it’s not the same as the return you actually compound at over time.
- Good for: describing a typical single-year return.
- Not great for: “What will my money become after 20 years?”
Geometric average (CAGR)
This is the “compounded” average — the constant rate that would produce the same ending value over a period. It’s typically lower than the arithmetic average when returns are volatile.
- Good for: long-term growth modeling.
- Matches: how compounding actually behaves.
Nominal vs real returns
Inflation is the difference between “my account balance grew” and “my lifestyle improved.”
- Nominal return = what your investment statement shows.
- Real return = nominal return minus inflation (roughly). This is your buying-power growth.
- After-tax return = what you keep after taxes (varies a lot by account type).
A simple planning table (example assumptions)
These are not promises — just a clean way to plan without pretending you know the future.
| Scenario | Nominal return | Inflation | Real return (rough) | Use case |
|---|---|---|---|---|
| Conservative | 6–7% | 2–3% | 3–5% | Early retirement math, safety-first planning |
| Base | 8–10% | 2–3% | 5–8% | Long-run “normal” expectations (still uncertain) |
| Aggressive | 10–12% | 2–3% | 7–10% | Stretch goal scenarios (don’t rely on it) |
Why averages can be misleading
These are the traps that make people overconfident.
- Sequence of returns risk: The order of returns matters a lot, especially when you start withdrawing.
- Valuation starting point matters: Expensive markets can have lower future returns (and vice versa).
- Dividends and fees: Total return includes dividends; fees reduce what you keep.
- Taxes: Taxable accounts can drag returns versus retirement accounts.
- Time horizon: 5-year “average” can look nothing like 30-year “average.”
Use a calculator (with realistic assumptions)
Modeling your own numbers is better than memorizing one “average return” quote.
FAQ
Common questions people have when they hear “average return.”
What’s the average return of the S&P 500?
People often cite “around 10% per year” as a long-run nominal average for broad U.S. stocks, but the exact figure depends on the time period and whether you use arithmetic vs geometric averages. Use it as a rough reference, not a guarantee.
Should I use nominal or real return in planning?
Real return (after inflation) is usually better for planning your future lifestyle. If you’re using nominal returns, remember that inflation reduces buying power over time.
Why does my return not match the “average”?
Because you don’t invest in “average years.” Markets are volatile and the order of returns matters. Your personal return depends on contribution timing, withdrawals, fees, and taxes.
What about global stocks?
Global markets can behave differently from U.S. stocks over long periods. Diversification can reduce risk, but it doesn’t eliminate volatility or guarantee returns.