Guide
Average Return Assumptions Explained
Calculators use an average return to keep things simple, but real life is uneven. Here’s how average vs variable returns differ and how to test ranges.
Published: March 12, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
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Save low, base, and high scenarios to see how different return assumptions shift results.
Open the calculatorQuick answer
“Average return” is a simplification. Real returns move up and down. The practical move: run low/base/high scenarios instead of trusting one number.
Disclaimer
Educational purposes only; not financial advice. Examples are illustrative; real returns vary and investments can go down as well as up. Fees, taxes, inflation, and rules vary by provider and country.
Average vs variable returns
An “average return” is a single number used to estimate growth. Variable returns reflect real life: some years are higher, some are lower. The path of returns changes the ending balance, not just the average.
Simple illustration
Starting amount: £10,000 over 4 years. Two paths with a similar average can end differently:
| Path | Yearly returns | Ending balance (approx.) |
|---|---|---|
| A | +5%, +5%, +5%, +5% | ~£12,155 |
| B | +20%, -10%, +10%, 0% | ~£12,078 |
Both paths feel similar on average, but the timing of ups and downs changes the result.
Why calculator outputs differ from real life
- Returns are rarely smooth.
- Contributions happen over time, not all at once.
- Timing matters (when money is added).
- Fees and taxes reduce outcomes.
- Inflation changes purchasing power.
Use assumptions safely in the calculator
Run three scenarios:
- Conservative (low)
- Base (middle)
- Optimistic (high)
Also compare time horizons (e.g., 10 vs 20 years) to see how long-term compounding changes results.
Open the calculatorCommon mistakes
- Treating an average as a promise.
- Using one high number without a conservative scenario.
- Ignoring fees and taxes.
More pitfalls: compound interest common mistakes.
FAQ
What does “average return” mean?
It’s a simplified single rate used for estimates. Real returns vary year to year.
Why don’t real returns match the average?
Ups and downs happen at different times, and fees, taxes, and timing effects change outcomes.
Can two investments with the same average return end differently?
Yes. Different sequences of returns can produce different ending balances even if the averages look similar.
Should I use one rate or a range?
Use a low/base/high range to see sensitivity. Avoid relying on one number.
How do fees change long-term results?
Fees reduce effective returns and can compound over time, lowering the ending balance.
How do I model volatility in a simple calculator?
You can’t model every path, but you can test multiple rates (low/base/high) and different horizons.
Should I include inflation?
You can test a lower “after inflation” rate as a rough view of purchasing power.
How can I make projections more realistic?
Use ranges, adjust for fees, consider inflation, and compare multiple time horizons.
Compare scenarios in the tool
Save low, base, and high cases to see how much the range matters.
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