Google “average stock market return” and the same number pops up everywhere: 10%. It’s on finance blogs, retirement calculators, YouTube videos, your uncle’s investing advice. So if you plug 10% into a 30-year plan for $500 a month, you’d expect to retire with about $1.13 million. Sounds great — except the real number you should be planning with is closer to 7%, and that difference quietly costs the average investor hundreds of thousands of dollars in false confidence.

It’s not that 10% is a lie. It’s that it’s the wrong number for the question you’re actually asking. Here’s what’s really going on, and what to plug into your own plan instead.

The Number Everyone Quotes (and Why It’s Incomplete)

The “10% average return” claim comes from real data: since 1926, the S&P 500 has averaged roughly 10-10.5% a year in nominal terms. That figure isn’t made up, and it’s the one you’ll see cited in almost every article about long-term investing.

The problem is the word “nominal.” That 10% includes years where inflation ran at 3%, 8%, even higher. It tells you how much your account balance grew in dollar terms — not how much richer you actually got. And when you’re planning decades into the future, purchasing power is the only number that matters.

Trap #1: Nominal vs. Real Returns

Inflation has averaged roughly 3% a year over the long run in the U.S. Subtract that from the 10% nominal stock market return, and you land at a real (inflation-adjusted) return closer to 7%. That 3-point gap doesn’t sound like much. Over 30 years of compounding, it’s the difference between retiring comfortably and coming up short.

Here’s the mental model that helps: 10% tells you how many dollars you’ll have. 7% tells you how much those dollars will actually buy when you go to spend them. If you’re building a retirement or savings plan, you want the second number.

Trap #2: Arithmetic vs. Geometric Averages

There’s a second, sneakier issue. The “10%” figure is usually an arithmetic average — you add up each year’s return and divide by the number of years. But your money doesn’t grow arithmetically; it compounds. And volatility drags compounded growth below the simple average.

A quick example: if your portfolio gains 50% one year and loses 50% the next, the arithmetic average is 0% ((50 + -50) / 2). But your actual balance? Down 25%, because a 50% loss needs a 100% gain just to break even. The geometric (compound) average return is what actually shows up in your account, and it’s always lower than the arithmetic average when returns bounce around — which the stock market always does.

What This Means in Real Dollars

Let’s make this concrete. Say you invest $500 a month for 30 years. Here’s how the ending balance changes depending on which return assumption you use:

• At a 10% nominal return: your $500/month grows to roughly $1,130,000
• At a 7% real (inflation-adjusted) return: it grows to roughly $610,000
• The gap: about $520,000 — more than the smaller balance itself

Neither number is “wrong.” The $1.13 million is what your account statement might actually show in future dollars. The $610,000 is closer to what that money will be able to buy in today’s purchasing power. If you’re building a retirement plan around the bigger number, you’re planning for a lifestyle you may not actually be able to afford. Plug your own contribution amount and timeline into our investment calculator to see how the two assumptions play out for your specific numbers.

So What Number Should You Actually Plan With?

Most fee-only financial planners use somewhere between 6% and 7% for a diversified stock-heavy portfolio when they’re projecting in today’s dollars. That range already accounts for inflation and the compounding drag from volatility, so you don’t need to do the math twice.

If you’d rather work in nominal (future) dollars — which can be useful for comparing against a fixed goal like a mortgage payoff — 8% to 9% is a more defensible number than 10%, especially once you factor in fees, taxes on a taxable account, and the fact that your portfolio probably isn’t 100% stocks the whole way through.

The closer you get to actually needing the money, the more this matters. A 25-year-old with 40 years to go can ride out a bad decade. Someone five years from retirement can’t — a market drop right before or right after you stop working (called “sequence of returns risk”) can do lasting damage even if the long-term average eventually recovers.

How to Protect Your Plan From This Trap

You can’t control what the market actually returns. You can control how you plan around it:

• Use 6-7% real (or 8-9% nominal) as your default planning assumption, not 10%
• Run your numbers twice — once at your expected return, once a couple points lower — so you know your downside plan
• Keep contributing on a set schedule through downturns instead of trying to time the market
• Shift toward more bonds and cash in the 5-10 years before you’ll actually need the money
• Revisit your assumptions every year or two rather than setting them once and forgetting them

None of this means investing is a bad idea — quite the opposite. Even the “disappointing” 7% real return roughly doubles your money every decade. The trap isn’t the stock market; it’s planning your life around a number that was never designed to answer the question you’re asking.

Frequently Asked Questions

What has the S&P 500 actually averaged historically?

Since 1926, the S&P 500 has returned roughly 10-10.5% a year on a nominal, arithmetic-average basis. Adjusted for inflation and compounding, the real, geometric return has historically been closer to 6.5-7% a year.

Should I lower my return assumption as I get closer to retirement?

Generally yes. Most target-date and balanced portfolios shift from stocks toward bonds as retirement nears, which lowers both the expected return and the volatility. A 5-6% assumption in the final stretch before retirement is more realistic than the 7%+ you might use in your 20s and 30s.

Is a 7% return assumption too conservative?

Not for planning purposes. It’s better to slightly overestimate what you’ll need and end up with extra than to plan around an optimistic number and come up short. If the market outperforms your 7% assumption, that’s a pleasant surprise, not a problem.