Investors often have expectations of real annual returns greater than 7 percent — the areas in green. But over 20 years or longer, rates that high are rare.

The 7% annual return figure may be related to something Warren Buffet said around 2013:

The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.” [1]

Note that Buffet's 6-7% estimate is for nominal annual returns. His estimate of real annual returns is 4-5%

There was a recent McKinsey study [2] also describing a likely long-term scenario of 4% real returns on US equities.

Note that these are returns on equities, which is considered to be the riskiest asset class in a traditional investment portfolio. A balanced portfolio of equities and bonds is expected to have a long-term annual nominal return of just 4-4.5% (corresponding to an annual real return of 2-2.5%) [3]

Pension funds and endowments typically invest in a mix of equities and bonds. These pension funds are structured by actuaries who have made outrageously optimistic assumptions about future returns, with the average US state pension plan assuming a 7.69% nominal annual return. [3] In a rare public admission, in 2008 a pension actuary for New York State declared his work to be "a step above voodoo." [4] In a more recent dose of reality, it was disclosed by Calpers that the public pension fund earned a return of 0.6% in 2015. [5]

Also, note that individual investors do not earn the "average long-term return" (which is just a theoretical number). Actual returns experienced by individual investors are more volatile and highly sensitive to the timing of when the started and finished invested. This timing is completely out of an individual's control, it is based on when a person was born and when they reach retirement age. One way to think about this problem is, what would be the cost of insuring investors against this "timing" volatility? Based on current market rates and some back of the envelope calculations, the rough answer is that it costs about 1.5 to 2% per year to buy such protection on a balanced portfolio. Once you deduct the insurance expense from the expected 2-2.5% real return, you are left with an expected 0% to 1% annual real return. To put this in perspective, a $100,000 investment compounding at 1% for 20-years would earn just $22,000 over 20 years. Meanwhile, "millennials" are apparently banking on a 10% annual return on their investments. [6]

What all this says to me, personally, is that the traditional narrative of individual "retirement," "saving" and "investment" is a delusion. There is no "safe," "slow and steady" approach for lower and middle-class people to build up for financial survival later in life. A different kind of strategy is needed, one that is based on higher risk taking. This is one reason that I think doing a startup makes a lot of sense for people who are talented - better to take a big risk, invest yourself, amp up the risk massively, and then work extremely hard and gradually "derisk" by doing all the things that good startups do. This probably has better odds of a successful "retirement" than the traditional idea of working in a corporate job and trying to climb the overcrowded corporate ladder while saving little by little in a defined contribution group pension plan.

[1] http://www.csmonitor.com/Business/The-Simple-Dollar/2013/050...

[2] https://www.bloomberg.com/news/articles/2016-04-27/be-afraid...

[3] http://www.economist.com/news/finance-and-economics/21678812...

[4] http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-...

[5] https://www.bloomberg.com/news/articles/2016-07-18/calpers-l...

[6] https://www.bloomberg.com/news/articles/2016-06-16/wanted-bi...