The rate of return for your investment portfolio is calculated by comparing the original amount of your investment to the value of your portfolio at the end of a specified period. Your goal is to produce an amount of money greater than your original investment. To do this, you may take more risk with some of your investments, in the hope of earning higher returns.
If you choose to invest in higher risk investments, your investments could decrease in value either temporarily or permanently. If you are young, you have time to wait out the market. However, as you get closer to retirement, you should be more interested in preserving your investment. You do not want to lose money and you need to ensure that it provides your planned retirement income.
When you are more interested in preserving your investment than growing it, you want to choose investments that meet the objective. These include more conservative investments, with lower opportunities for growth and a lower overall return. For this reason, use lower expected rates of return when estimating any growth on investments during the pre-retirement years.