Question:
What is the approximate rate of return I can expect from the funds invested in my retirement annuity when when I retire?
Answer:
Bill,
It is not clear whether you are asking about the return pre- or post-retirement, but the principles are essentially the same.
Your rate of return depends primarily on your asset allocation and the fees you pay. If you choose to go with an active manager, it will also depend on how well your fund manager performs. Most lag the average market return over time, after fees.
Short term returns are quite unpredictable, of course, unless you own a low risk, low volatility portfolio (holding mainly cash and some bonds). Such a low-risk portfolio should deliver a return of between 1% and 2% pa in real (after-inflation) returns.
As your equity exposure in your portfolio increases, so your short term volatility will increase, but your long-term return should also increase. Based on historical real returns, slightly moderated for the sake of conservatism, you should expect a long-term real (after-inflation) return of around 5% pa on high-equity balanced portfolio (ie 75% invested in shares). As your equity exposure falls, so would your long term real return; in a medium equity portfolio, you should therefore only expect to earn between 3% and 4% real pa over the long term.
All these returns are before fees. If you are paying fees of 3% pa (as you might with some life company RAs or living annuities), you can see that your real return will reduce massively, by 60% or more! This has a massive effect on your long term savings outcome, or on how long your money will last post-retirement. In a low or medium equity portfolio, you may then just preserve your contributions or investment, adjusted for inflation.
So it is critical that you a) get an asset allocation appropriate for your investment horizon and b) that you pay low fees, so that you keep as much of the investment return as possible.
