As the year draws to a close, many in the UAE start thinking about financial resolutions — and one of the most important goals is securing a comfortable retirement. Planning for retirement may sound simple in theory — spend wisely, save regularly, and invest smartly — but in reality, the process involves many uncertainties. How much do you need to save? Where should you invest? And perhaps most importantly, what kind of returns can you realistically expect?

These are questions that don’t have one-size-fits-all answers. Your investment choices will depend on the lifestyle you envision, how much risk you’re willing to take, and your long-term goals. However, understanding expected returns is the foundation that helps guide all other decisions.

What to expect from your investments

No one can accurately predict the future of financial markets, but understanding general return patterns can make retirement planning more practical. Typically, investment returns depend on the type of assets you hold — bonds, equities, gold, or private investments — and how long you plan to hold them.

Bonds are often considered more predictable. If you buy a bond and hold it to maturity, your total return can be estimated based on its yield — assuming no default occurs. Yet, short-term volatility is common. For instance, when global interest rates surged in 2022, bond prices dropped sharply. A useful approach is to take the bond yield and subtract around 1.5% to 2.5% to account for possible defaults, especially for high-yield or lower-rated bonds.

Equities (stocks) are less predictable in the short term but generally offer stronger long-term growth. Analysts’ forecasts for global stock markets, such as the US S&P 500, often vary widely year by year. But over a 10-year horizon, the average expected annual equity return typically ranges between 3.5% and 7.5%. When compounded, that difference becomes significant — an investment earning 3.5% annually could grow by about 40% over a decade, while one earning 7.5% could more than double in value.

The changing balance between bonds and equities

In recent years, the return gap between equities and bonds has been narrowing. This trend is partly due to the sharp rise in bond yields since 2022 and the increase in stock market valuations that can limit future equity growth. Current long-term global averages estimate equity returns at around 7% annually, compared to about 4.5% for bonds.

This raises an important question: should investors consider allocating more to bonds? While equities generally outperform over the long term, bonds provide stability and lower volatility — which can be especially valuable for retirees seeking predictable income.

The inflation factor

One crucial consideration for investors in the UAE and globally is inflation. Even small differences in inflation rates can have major long-term effects on real returns. While global inflation is expected to stay moderate, US inflation — which influences global markets — may remain slightly higher than the 2% level seen before the pandemic, possibly closer to 3%.

This seemingly small change could reduce inflation-adjusted investment returns by 1% to 1.5% annually. Bonds, being fixed-income assets, suffer the most from inflation, as their payouts don’t increase with rising prices. Equities, however, tend to adjust better since corporate earnings and dividends can grow in line with inflation over time.

If inflation is expected to remain structurally higher, it may make sense to keep a greater proportion of your portfolio in equities or inflation-sensitive assets like commodities.

Other assets to consider

Gold remains a popular choice for investors looking to hedge against inflation and market uncertainty. While it doesn’t generate income, gold’s value as a safe-haven asset makes it a strong portfolio diversifier. Many advisors recommend allocating around 5–10% of an investment portfolio to gold — an approach that has served investors well during volatile periods.

Another growing trend is investing in private assets, such as private equity and private credit. These can offer potential annual returns of around 8–10%, though they come with higher risks and lower liquidity. Meanwhile, hedge fund strategies may deliver moderate returns (4–7%) while smoothing out volatility, providing balance to a diversified portfolio.

Putting it all together

Ultimately, expected returns are only one piece of the retirement planning puzzle. A well-structured portfolio must balance return potential with acceptable risk levels. This often means diversifying across multiple asset types and re-evaluating your investment mix as you move closer to retirement.