Roth IRA interest rates

[sarah]

I am opening a stock index fund based IRA. Based on the current market what would be a reasonable rate of return to expect.

[disneysteve]

I am opening a stock index fund based IRA. Based on the current market what would be a reasonable rate of return to expect.

That depends. First, which stock index does the fund track? Second, the current market has nothing to do with the answer to your question. This is an IRA so presumably a long term investment. Your question should be what return can you expect between now and the time you retire?

[kork13]

Is the "stock index fund" you refer to the S&P 500 (or something similar)? Assuming nothing cosmic or crushing happens with the markets, you can realistically expect returns between 8-11% annually. Keep in mind, however, the fact of that being a fairly significant assumption. As the standard investment CYA statement goes, "historical results are not a guarantee of future returns." Just in the last 20 years, there have been hugely strong years (+37.5% in 1995) and absolutely terrible years (-37.0% in 2008). But over the long term, returns have been fairly reasonable.... over the past 20 years, the average annualized return has been about 8.4%.

[Petunia 100]

If you go to Morningstar and look at your particular fund, you will find a great deal of information.

For example, this snapshot of Vanguard's Total Stock Market Index Fund http://quotes.morningstar.com/fund/vtsmx/f?t=vtsmx tells me that over 10 years, the fund has a standard deviation of 15.38 and a mean of 9.01. (To see this info, click on the "ratings & risk" tab, then scroll down to where it says "volatility measures". Click the "10 yr" tab and you're there). What does this tell you? Well, "mean" is the average. So over 10 years, the average return has been 9.01.

The standard deviation tells you something about volatility. In a normal distribution (bell-shaped curve), two-thirds of the data points fall within one standard deviation of the mean. Also, 95% of the data points fall within two standard deviations of the mean. The "outliers", 2.5% on each end, will be more than two standard deviations away. In other words, two-thirds of the time the fund will have an annual return somewhere between -6.61% and +24.39%. And 95% of the time, the fund will have an annual return somewhere between -21.99% and +39.77%.

So you should expect years with lousy returns and years with wonderful returns. Over time, they should average out to about 9%.

[sarah]

Thank you. I just wanted some general ideas.

[Petunia 100]

Thank you. I just wanted some general ideas.

Also you should keep in mind, the more your fund charges you in expenses, the less is left for you to keep. For this reason, you want to choose a custodian with low costs.

You've made a smart decision to open a Roth IRA.

[disneysteve]

Thank you. I just wanted some general ideas.

Everything that folks have posted is true, but still doesn't address your question.

What stock index are you talking about? Is it a total stock market index, an S&P 500 index, a value stock index, a high dividend stock index, an international stock index, etc?

There are literally hundreds of stock index funds and the answer to your question depends on which fund you are using.