Your Expected Return
Most Canadians don't begin to take retirement seriously until they are at least in their thirties, and more likely in their forties. And those are the responsible ones! This leaves them with perhaps 20 or 30 years to build the assets they'll need when their full-time working years are over. If you are using capital accumulation vehicles such as RRSPs to build your retirement security, the key to success is in knowing what return you can expect on your savings. This will dictate how much you should save and when you can afford to retire.
The future is unknowable in many respects, but a number of indicators will give us at least an inkling of the kind of investment return we can expect in the next 20 to 30 years. For example, in 1975 inflation and interest rates were high and climbing, and the economy was still struggling to cope with the first of the oil-price shocks. In spite of all that, we would have had reason to believe that the years 1975 to 1999 would turn out better for investors than the period between 1951 and 1975. One indicator was the level of inflation at the start of the period and its most likely future direction. The principle of reversion to the mean suggests that when a given indicator (like inflation) strays too far from historic norms, it usually snaps back. Inflation was at a very low level in the 1950s, generally in the 0 to 2 per cent range, but then started climbing in the 1960s. By 1975, it was approaching double digits. Reversion ...