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Thane Stenner, director for wealth management at StennerZohny Investment Partners, part of Toronto-based Richardson GMP Ltd.Amanda Palmer/The Globe and Mail

Investors can find plenty of advice about how to make retirement money last. Some financial planners tout the 4-per-cent rule, where you withdraw no more than 4 per cent each year from your nest egg. Others recommend working a few years longer or taking a part-time job in retirement.

But there's one thing most financial experts agree on: Ensuring you'll have enough money starts with an investment portfolio built on a realistic expected rate of return. This is especially important today with Canadians living longer – up to five years more on average than their predecessors, experts say.

"Twenty to 25 years ago, people would have said that getting a 10-per-cent return was a fair assumption," says Thane Stenner, director for wealth management at StennerZohny Investment Partners, part of Toronto-based Richardson GMP Ltd. "But that's no longer the case today, and in the next five to 10 years investors are going to have to dial down their anticipated or projected rate of return."

So what is a realistic rate of return these days? Mr. Stenner points to a range between 4 per cent and 6 per cent for a balanced portfolio. This assumes a return on stocks of between 6 per cent and 8 per cent – much lower than historical averages of 10 per cent to 12 per cent – and fixed-income returns of between .5 per cent and 3 per cent.

"With interest rates literally at all-time lows, the fixed-income portion of a balanced portfolio is going to hurt and will drag down the portfolio," says Mr. Stenner.

Paul Shelestowsky, a senior wealth adviser at Meridian Credit Union in Niagara-on-the-Lake, Ont., pegs a realistic expected rate of return at 5 per cent. Financial planning software typically bases expected returns on past performance of portfolio assets, and some of these programs use a default rate of 7 per cent.

  • Join a live discussion with Thane Stenner about projected rates of return on Friday, March 6. Click here.

Mr. Shelestowsky says he generally takes the software-generated rate of return and drops it by three to four percentage points.

"But that depends on a number of factors, such as what's in the client's portfolio, because we know different assets will generate different rates of return," Mr. Shelestowsky says. "If they are in an equity fund that's expected to do high single digits we might drop our expectation by only two percentage points, and if they're heavy into GICs then we assume a 2- to 3-per-cent rate of return."

Risk tolerance is another factor Mr. Shelestowsky takes into account when setting performance expectations. For conservative clients, he might build a financial plan based on a rate of about four percentage points lower than the software-generated figure. He's even had clients ask to achieve a 1-per-cent return.

"One couple asked if we could make it work if they put their money into a savings account," Mr. Shelestowsky says. "That's very rare, and it usually happens when that 1 per cent of return is not expected to be their only source of retirement income. There might be an inheritance or a pension, or the thinking is why risk assets they don't really need."

Investors should also plan for inflation when setting their expectations, Mr. Shelestowsky adds. The rule is simple: As the assumed rate of inflation goes up, the expected rate of return goes down.

"Keep in mind that most software just provides the rate of investment return, not the real rate of return," he says. "It's important that you factor in the assumed inflation rates or your after-tax income 20 years from now could be much less than you thought."

Terry Shaunessy, president and portfolio manager at Shaunessy Investment Counsel Inc. in Calgary, sets a higher target than Mr. Shelestowsky and Mr. Stenner. Assuming inflation and portfolio volatility of 10 per cent to 11 per cent, he says investors can realistically shoot for a long-term return of 7 per cent.

"Seven per cent will have you doubled over every 10 years," he says. "But the numbers are always changing, that's why rebalancing your portfolio is important."

Income and net worth also tend to influence the return rate investors want to see from their portfolio. Mr. Shelestowsky says his high-net-worth clients are more likely to be risk-averse, especially as they near retirement.

If a client says he wants to retire in five years but doesn't have enough money, "Our solution might be to be a bit more aggressive," Mr. Shelestowsky says. "We might push the rate of return to the high single digits, maybe 7 per cent instead of 5."

Beyond setting realistic rates of return, achieving the right asset mix is critical, Mr. Stenner says. He encourages average-income investors to buy into exchange-traded funds (ETFs), which hold baskets of stocks, bonds or assets such as commodities, and track the performance of an index or asset class.

"The average Canadian should be using ETFs even more because they're a low-cost way to implement a good asset mix," Mr. Stenner says. "Research shows that more than 80 per cent of all investment performance is based upon getting your asset mix correct."

High-net-worth investors, on the other hand, have access to more options, he says. For this group, he recommends a strategy that combines active and passive investments, with ETFs at the core.

Regardless of income and wealth, investors need to take a prudent and realistic approach in building their retirement nest egg, says Mr. Stenner.

"The reality is that investors are going to have to accept more volatility in their portfolios," he says. "We've had a five-and-a-half-year bull market run in stocks and bonds, and that's likely going to be challenged."

Adding up the returns

What's in a percentage point – or two? A lot, when you're talking about invested money growing over several decades.

Paul Shelestowsky, a senior wealth adviser at Meridian Credit Union, looks at three hypothetical investors, each of whom put away $100 every two weeks for 30 years, for a total investment of $78,000. Each had a different rate of return, at 3 per cent, 5 per cent and 7 per cent.

The 3-per-cent investor saw growth of $47,471 and retired with $125,471, while the 5-per-cent investor added $98,858 to the original capital and came away with $176,858. The 7-per-cent investor, who assumed a higher risk, ended up with $253,767.

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