What is a required rate of return?

In personal financial planning, the required rate of return is the yearly return a portfolio must earn to reach a goal — a target amount by a target date — given the capital already saved and the contributions planned. It turns a vague goal into a concrete question: is the return this plan depends on realistic for the investments it holds?

In corporate finance the same term means the minimum return investors demand for taking on a given risk. The idea is related: a return that has to be reached for the investment to make sense.

The formula

Without further contributions, the required return follows directly from the growth formula:

r = \left(\frac{G}{V_0}\right)^{1/n} - 1

where $V_0$ is today's capital, $G$ the goal and $n$ the number of years. With a regular yearly contribution $C$ , the required return $r$ is the rate that solves:

G = V_0 \, (1 + r)^n + C \, \frac{(1 + r)^n - 1}{r}

This equation has no direct solution for $r$ ; it is found numerically, by trying rates until both sides match.

A simple illustration

An investor has €50,000 and wants €150,000 in 15 years:

r = \left(\frac{150{,}000}{50{,}000}\right)^{1/15} - 1 \approx 7.6\%

If the investor also adds €3,000 at the end of each year, the required return falls to about 4.0%. Regular saving turns a demanding goal into one that a balanced portfolio can plausibly reach.

How to judge whether it is realistic

Compare the required return with what the portfolio's mix of investments can reasonably be expected to earn over the horizon, after costs:

Required return (nominal)	What it usually implies
+23	reachable with low-risk investments
+36	usually needs a substantial share of stocks
+68	needs a mostly stock-based portfolio, with its risk
+8	unlikely to be reached reliably the plan needs adjusting

These ranges are rough and depend on the level of interest rates and inflation at the time.

When the required return is too high

A plan that only works with an unrealistic return has four levers:

Save more each month or year.
Extend the horizon, giving compounding more time.
Lower the goal, or split it into a necessary part and a desirable one.
Accept more risk — the least reliable lever, because more risk raises the expected return but also the chance of falling short.

Expressing the required return in real terms, after inflation, and after costs and taxes, gives the most honest picture.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

What return would I need to reach my target by my deadline?

Tell me the target value and the deadline you want to reach, and I’ll calculate the required return.

If you want a quick reminder of current headline figures first: your portfolio is worth 90.989,80 €, you have invested 63.990,15 € and cash is 5.510,23 €.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

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