Vanguard's New Forecast Could Quietly Break This Key Retirement Rule

Most retirement projections, calculators, and rules of thumb were built on the assumption that U.S. stocks return roughly 10% per year over the long run. Understanding how well you've prepared for retirement requires checking whether that assumption still holds, and according to Vanguard's 2026 Economic and Market Outlook, it doesn't. 

The firm projects U.S. equities will return only 4% to 5% annually on average over the next five to 10 years, roughly half the historical norm, driven by stretched valuations and heavy market concentration in a narrow group of AI-related technology companies.

Here's what that forecast is based on, why it matters for people drawing down savings, and what Vanguard says to do about it.

Why Vanguard expects lower returns

Vanguard's report, titled "AI exuberance: Economic upside, stock market downside," lays out the core tension clearly: AI investment is genuinely transforming the economy and driving real earnings growth, but the stock market has already priced in enormous expectations for that outcome. The firm's global chief economist Joe Davis framed it directly: "More compelling investment opportunities are emerging elsewhere even for those investors most bullish on AI's prospects."

Vanguard's muted U.S. stock forecast is, as the report states, "nearly single-handedly driven by our risk-return assessment of large-cap technology companies." The expectation embedded in current prices is simply too high relative to what's likely to be delivered, even under an optimistic AI scenario. Earnings growth and creative destruction from new market entrants will erode aggregate profitability over time, which the market's current pricing does not adequately reflect.

The valuation context reinforces this. The Shiller CAPE ratio, which measures current stock prices against 10 years of inflation-adjusted earnings, stood at approximately 39 to 42 in early to mid-2026, the second-highest sustained level in over 140 years of data. The only period it was higher was the dot-com peak of December 1999, when it reached 44.19. At that valuation, the historical relationship between CAPE and subsequent 10-year returns implies annual gains closer to 2% to 3%, even lower than Vanguard's 4% to 5% forecast.

What a lower-return decade means for retirement withdrawals

This is where the forecast stops being abstract. The widely used 4% withdrawal rule, the common guidance that a retiree can withdraw 4% of their portfolio in year one and adjust for inflation annually without running out of money in a 30-year retirement, was developed based on historical return assumptions that include 10% average nominal stock returns. When expected returns fall to half that level, the math changes.

Research published by Morningstar found that the base-case safe withdrawal rate for 2026 retirees is 3.9% for portfolios holding 30% to 50% in equities, already below the traditional 4% threshold. On a $500,000 portfolio, the difference between a 4% and 3.9% withdrawal rate is modest in year one, roughly $500. But the compounding effect over 25 to 30 years of retirement is meaningful.

Sequence of returns risk is the deeper threat. This is the specific danger that a market downturn in the early years of retirement, when the portfolio is at its largest and withdrawals are ongoing, can permanently impair long-term sustainability even if average returns eventually recover. A lower expected return baseline increases the probability of exactly this scenario occurring in the critical first five years of a retirement. Someone who retires today with a 70% U.S. stock allocation and withdraws 5% annually from a portfolio experiencing 4% average nominal returns is drawing down principal faster than the account can regenerate.

What Vanguard recommends instead

Vanguard's investment hierarchy for the next five to 10 years is explicit: the strongest risk-return profiles across public investments are, in order, high-quality U.S. fixed income, U.S. value-oriented equities, and non-U.S. developed-market equities. These three categories are expected to outperform concentrated U.S. growth stocks over the forecast period.

High-quality bonds are projected to return near current income levels, roughly 4% to 5%, which is a comfortable margin above expected inflation. That's a meaningful shift from the near-zero real return environment of 2010 to 2021. Bonds are also back as a portfolio diversifier: in a scenario where AI disappoints and growth slows, fixed income is expected to hold value while growth stocks suffer. U.S. value stocks and non-U.S. developed-market equities should benefit as AI's economic gains eventually broaden beyond the current concentrated technology sector.

Practically, this argues for trimming withdrawal rates modestly from any starting point above 4.5%, shifting equity exposure away from pure U.S. large-cap growth concentration, and increasing allocations to bonds, value, and international developed markets. None of these moves requires abandoning stocks entirely or reacting dramatically to a single forecast.

Bottom line

Vanguard's 4% to 5% return projection is not a prediction of a stock market crash. It is a forecast that the next decade of U.S. equity returns is likely to look different from the last three decades, primarily because valuations have already priced in a great deal of the good news about AI. For retirees who built their retirement plan assuming 7% to 10% portfolio growth indefinitely, the gap between that assumption and a 4% to 5% reality is meaningful enough to revisit before it shows up in a declining balance.

The most useful near-term action is to check withdrawal rates and portfolio concentration against Vanguard's expected return environment rather than the historical average. A retirement plan built around diversified, balanced allocations, modest withdrawal rates, and realistic return expectations is better positioned to survive a lower-return decade than one that simply assumes the last decade will repeat itself.