How to Set Realistic Long-Term Financial Planning Assumptions

Retirement projections are only useful when they are based on realistic assumptions. If your estimates for inflation, investment returns, or life expectancy are overly optimistic, your financial plan can give you a misleading sense of security.

Research frequently shows that investors overestimate future rates of return, especially after periods of strong market performance. Recent gains in equity markets can make people expect similar results indefinitely, which is rarely a safe assumption when planning for retirement.

For context, the S&P/TSX Composite Index produced a total return of 34% over the last 12 months, while the S&P 500 (measured in Canadian dollars) returned 24% over the same period. Over the past decade, annualized returns for these indices were about 13% and 16% respectively—figures that many financial planners consider unlikely to repeat year after year.

The FP Canada Standards Council and the Institute of Financial Planning update their Projection Assumption Guidelines each April. These guidelines are designed for Certified Financial Planners (CFPs) and Québec Planificateur financiers (Pl. Fin.), but they also provide a useful benchmark for Canadians estimating their own financial futures.

Inflation

Inflation became more noticeable in Canada in 2022, when the year-over-year Consumer Price Index (CPI) average reached 6.8%. For most of the past 30 years, inflation has hovered between 1% and 3%, which aligns with the Bank of Canada’s target range.

When running long-term projections, it’s essential to account for higher living costs. Inflation affects everyday expenses, wages, government pensions and many private pensions. Canada’s current annual inflation rate is approximately 2.4%, but the Guidelines recommend using a long-term inflation assumption of 2.1%.

For salary growth, the Guidelines suggest using inflation plus one percentage point, which would imply a conservative long-term salary growth estimate of around 3.1%.

Investment returns

Long-term planning must also consider the possibility that markets could perform poorly early in retirement—a risk known as sequence-of-returns risk. Early downturns can substantially increase the likelihood of depleting a retirement portfolio, so conservative return assumptions help protect against that outcome.

The Guidelines propose the following long-term nominal return assumptions (before fees and taxes):

3.2% for fixed income (bonds)
6.3% for Canadian equities (stocks)
6.4% for U.S. equities (stocks)
6.6% for international developed-market equities (stocks)
7.5% for emerging markets equities (stocks)

If you model outcomes using Monte Carlo analysis, you can add 0.5 percentage point to the equity return assumptions to reflect the potential upside that comes from variability in returns. Even so, planners generally expect future stock returns in the mid-single digits to low- to mid-7% range—not the double-digit annual gains some investors have recently experienced.

Remember that these figures are nominal returns and do not account for inflation. Subtracting the suggested 2.1% inflation assumption yields real return expectations that are meaningfully lower. The return assumptions also ignore investment management fees, which for some investors can range from negligible (self-directed investors) to 2% or more for mutual fund investors. Financial planners commonly reduce projected returns by 1% to 1.5% for clients who pay advisory or fund management fees.

Investment fees and taxes can substantially reduce net returns. Tax treatment varies by account and by the type of income generated, so it’s important to model after-tax returns that reflect your specific situation.

Real estate price growth

The Guidelines include shelter costs for the first time and recommend assuming real estate prices and rents will grow at inflation plus 1%—or about 3.1% using the recommended inflation rate. While housing markets have seen strong appreciation in recent years, using a modest 3.1% assumption for future price growth is a more conservative and defensible approach for long-term projections.

Investors in rental properties should remember that expected returns can include both capital appreciation and rental income. The Guidelines suggest assuming rent increases at the same 3.1% rate.

Mortgage rates

The recommended borrowing-rate assumption is 4.4%, which is above many current advertised mortgage rates but closer to a long-term average. Young borrowers who grew accustomed to 2%–3% mortgage rates should be aware that rates have moved back toward a more neutral, longer-term level.

Life expectancy

Statistics Canada defines life expectancy as the average number of years a person is expected to live, while probability of survival measures the likelihood of living to a specific target age. For retirement planning, probability of survival is often the more useful metric because it helps quantify the risk of outliving your savings.

For example, a 60-year-old woman has about a 50% chance of living to age 91; a 60-year-old man has about a 50% chance of reaching age 89. If you prefer to plan conservatively, consider the age to which there is a 25% chance of survival: for a 60-year-old woman that is about 96, and for a 60-year-old man about 94. For couples, probabilities shift: there is a 25% chance that at least one partner in a male-female couple will live to age 98, and similar probabilities for same-sex couples are slightly different depending on the combination of genders.

How to use the Guidelines

The Projection Assumption Guidelines are intended as a practical framework for developing realistic and defensible long-term (10+ years) financial projections. Projections are not precise predictions; their value lies in helping individuals and advisors make prudent decisions despite long-term uncertainty.

It’s fine to hope for the best, but decisions made today should be grounded in conservative, defendable assumptions. Lower, more realistic return and inflation assumptions may produce less flashy projections, but they reduce the likelihood of unpleasant surprises during retirement.

Read more about retirement:

• The 4% rule, revisited
• We’re 10 years apart—can we retire together?
• How to model retirement income