Ask the experts

When preparing for retirement, would you still recommend setting your expectations based on historical stock market returns? --Archie Holmes, Charlottesville, Va.

You've probably heard the saying "Past returns are no guarantee of future performance," right? Well, that's never been as true as it is today. In fact, you should assume stocks will gain closer to 7% annually going forward (or 4% after inflation) -- not their 9.9% historical rate, says Chicago financial planner Chris Long.

Why? For starters, stocks aren't cheap anymore, not after their powerful rebound last year. The price/earnings ratio for the broad market is 19.5, based on 10 years of average profits (this is a conservative way to gauge the market). This means U.S. equities are selling at around a 20% premium to their long-term average. And when stocks are pricier than average, they tend to perform worse than average.

Also consider how those returns were generated. Over the past three decades, equities got a big boost from a trio of economic tail-winds: dwindling inflation, falling interest rates, and lower unemployment. Guess which direction all three are probably headed?

Remember too that those historical returns include a time when America was actually an emerging economy. The U.S. is all grown up now and is expected to grow slower than the rest of the world.

Bottom line: You can't afford to fall short with your retirement savings, so err on the side of caution. Says Long: "You'll have a bit of shock absorption by using the lower averages." --Carolyn Bigda

NEXT: Retirement income