Do You Know the Two Most Important Assumptions in Your Retirement Plan?

If you’ve ever worked with a financial advisor or used retirement planning software, you’ve likely come across a colorful projection or a Monte Carlo simulation. While most people focus on the big picture - "Do I have enough money to retire?" - often overlooked are the underlying assumptions driving the result.

At the heart of every retirement plan are two core assumptions that drive everything—from your projected net worth to your ability to retire when you want:

1. What Rate Will Your Investments Grow?

2. How Volatile Will That Growth Be?

These two factors—return assumptions and volatility assumptions—are the foundation of any retirement projection.

How Much Will Your Assets Grow?

The first critical assumption is about investment returns: What kind of growth should you expect from your portfolio? Every retirement plan needs a baseline rate of return for each asset class you’re invested in. These might include:

• U.S. large-cap stocks

• Small-cap stocks 

• International stocks 

• Emerging markets stocks

• Bonds

• Real estate

• Cash

But here’s the kicker: not all financial plans use the same return assumptions. Some assume U.S. stocks will grow at 12% annually (which matches historical long-term averages), while others might use a more conservative 7–8%.

Why does this matter? Because this one assumption powers your future income projections, your retirement date, and whether or not you’ll outlive your money.

What About Volatility?

Now let’s talk about standard deviation—or, as we often call it, volatility.

If expected return is the gas pedal, volatility is the brake. Volatility represents how much your returns might swing from year to year, and it gives your retirement plan a dose of realism. Consider this:

The S&P 500 has returned about 10.5% historically, but with a standard deviation of 15%. That means some years it’s up 25%, and others it’s down 15%. A plan that assumes smooth, linear growth? Unrealistic. A Monte Carlo simulation that factors in volatility? Much more useful.

If you'd like to see how this plays out in a real life example, watch our YouTube video below where we walk through a case study. 

Why This Matters

At Ark Royal Wealth Management, we believe in using conservative return assumptions and realistic volatility levels. Overly optimistic projections may make you feel better today but could leave you unprepared for the real ups and downs of retirement.

If you’re building or reviewing a financial plan, ask your advisor—or yourself—these two critical questions:

1. What investment return assumptions are being used for each asset class?

2. What standard deviation (volatility) is assumed for those returns?

Key Takeaways

Your return assumptions determine how much your wealth may grow over time. Your volatility assumptions shape how realistic and durable your plan is. Being conservative now could protect your future.

Whether you’re planning to retire in 5 years or 25, understanding these assumptions is essential to your financial future. If you’d like a second opinion on your current retirement projections, feel free to reach out—we’re here to help.