Understanding asset growth assumptions

Growth assumptions do more than any other input

Every long-term financial projection rests on one number that nobody can know in advance: the rate at which your assets will grow. Change that number by two percentage points and the 30-year outcome can double or halve. No other single input has remotely this much leverage.

Because the number is so sensitive, it is important to understand what common growth assumptions actually mean — and why plugging in an optimistic figure can make a plan look successful that, under realistic conditions, would fail.

What 5% vs 7% vs 10% actually compounds to

The difference between growth rates is subtle over a single year and dramatic over a lifetime. Starting from 10,000 units of currency:

• At 5% per year, after 30 years: approximately 43,000.
• At 7% per year, after 30 years: approximately 76,000.
• At 10% per year, after 30 years: approximately 175,000.

Raising the growth rate from 5% to 7% — two percentage points — nearly doubles the outcome. Going from 7% to 10% more than doubles it again. This is why choosing a realistic assumption matters more than almost any other planning decision.

Historical context, without promising the future

Over the 20th and early 21st centuries, broadly diversified equity portfolios in developed markets have produced nominal long-run returns in the 8–10% range before fees and inflation. After inflation — so-called real returns — the long-run figure sits closer to 5–7%. Bonds have historically produced lower nominal returns, typically 4–6%, and much lower real returns after inflation.

These are long-run averages over multi-decade periods. Any individual decade can and has delivered returns well above or well below these ranges. The 2000s delivered near-zero real equity returns for many markets. The 2010s delivered well above average. Future decades will not match either.

The reason to look at history is not to predict the future but to calibrate what is plausible. A projection using 12% real returns is outside the historical range and is unlikely to prove accurate. A projection using 3–5% real returns is inside the range and is appropriately humble.

Why conservative assumptions protect you

A financial plan that succeeds at 5% and fails at 3% is a fragile plan. A financial plan that succeeds at 3% and exceeds expectations at 5% is a robust plan. The difference is entirely in how you set the growth assumption.

Conservative assumptions protect you in two ways. First, if markets underperform your central case, the plan still works — the downside is absorbed. Second, they force you to save or contribute more than a rosy assumption would require, which also helps protect against other shocks (illness, job loss, unexpected costs).

The worst error in long-range planning is to assume the average and then find yourself living through a below-average stretch with no margin for it.

Real vs nominal — keep them separate

A projection can be run in two modes, and mixing them is a common error.

• Nominal projections use raw growth rates (e.g., 7%) and ignore inflation. Future balances appear large but reflect future pounds, which buy less than today’s pounds.
• Real projections subtract expected inflation (e.g., 7% nominal minus 3% inflation = 4% real) and produce balances in today’s purchasing power. These numbers are smaller but directly comparable to current expenses.

Both are valid. The rule is to keep them separate. If you project nominal growth, also project nominal inflation on your future expenses. If you project in real terms, use today’s expense levels unchanged. Mixing a nominal growth rate with today-currency expenses makes the plan look far healthier than it is.

What eats your growth

Your realised return is the stated return minus several quiet drags:

• Investment fees. A 1% ongoing fee can absorb 20–30% of a 30-year final balance. Our fee drag calculator quantifies the exact effect.
• Taxes on distributions and gains. Depends on jurisdiction and account type.
• Behavioural drag. Selling during drawdowns, missing the best days, paying trading costs on frequent moves.

A 7% headline return can easily become a 4–5% realised return once fees, taxes, and behavioural drag are included. Your projections should use the realised figure, not the advertised one.

Next steps

Run multiple scenarios with the net worth projection calculator — try 4%, 6%, and 8% real growth and compare the outcomes. Then check how much of the gap is explained by ongoing fees alone with the fee drag calculator. Realistic assumptions lead to plans that survive reality.