The Average IRA Return

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IRA rules have changed, but the fundamentals remain the same.

Interest rate returns determine how well you live during your retirement years. If your average rate of return is low during the accumulation phase of your retirement, then you won't be able to draw a sustainable income during your retirement years. If you are confused as to whether you want to invest using an IRA, it might be helpful to know what the average rate of return for an IRA is.

  1. History

    • IRAs were developed as a response to the high tax rates of the 1970s. IRAs were one of the retirement planning accounts that was introduced to help supplement social security and pension payments as well as help individuals save more money while providing a tax deduction. These accounts also had restrictions on contributions and withdrawals. While IRA rules have changed somewhat over the years, the fundamental concept remains the same today.

    Investment Options

    • IRAs can invest in a variety of financial products. This makes determining the average rate of return for an investment somewhat difficult. Equity investments, like stocks, have historically outperformed bonds and bond-like investments. So, average returns of an IRA will depend on your specific portfolio mix.

    Calculating Average Rate of Return

    • DALBAR Inc.'s quantitative analysis of investor behavior consistently shows that many investors' average investment returns are far less than any given stock index that the investor's individual and active trading strategy and financial products are derived from. For example, one DALBAR report shows that from 1987 to 2006, investors earned an average of 4.3 percent compared to the S&P500 returns of 11.8 percent. The study does not necessarily make a distinction between IRA and non-IRA earnings, however, many investors do use IRAs and 401(k) accounts as their primary retirement savings vehicles.

    Considerations

    • In regard to whether or not to invest in an IRA, consider several factors, including what your future tax rate will be. Additionally, average returns are reasonably predictable using investment products designed for long-term growth through appreciation and income. This decision may require the help of a professional financial adviser or investment manager.

    Warning

    • Excessive trading, timing the market and a general ignorance of how financial markets work will all undermine your attempts to achieve a high rate of return over time. Average investment returns of an IRA are highly dependent on your skill and ability as an investor.

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References

  • Photo Credit gold eggs image by Chepko Danil from Fotolia.com

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