Your assumptions about how big your retirement nest egg should be are probably all wrong.
If it’s any consolation, even the best minds in the retirement business are probably getting it wrong too, according to AQR Capital Management, a well-regarded hedge fund.
Flawed Return Assumptions
The reason for the miscalculation, say the AQR researchers, is that the investment professionals running 401(k)s and other defined contribution plans are using assumptions about investment returns based on historical performance that is unlikely to occur in the future.
What they’re saying, essentially, is that the 7.5% annual real return on equities, and the 2.5% annual real return on bonds that have been earned over the past 65 years and that are now being used as return assumptions for the future, are very unlikely to be realized; we’ve got to assume that we’ll be making much less on our investments in coming years.