Summary
- The S&P 500's long-run average annual return is a useful planning shorthand, but it rarely describes any specific year
- The historical distribution of annual returns is much wider than a steady average would suggest, with many years producing substantially larger gains or losses
- The average is built from a century of extreme variation, and staying invested through that variation is what generates the cumulative return
- Sequence of returns risk means the order of gains and losses matters as much as the average in retirement
What Is the S&P 500's Average Annual Return?
You may have heard that the U.S. stock market has historically returned around 10 to 12 percent per year over the long run. That figure is real: over the century from 1926 to 2025, the S&P 500 and its predecessor index produced an arithmetic average annual total return, including dividends reinvested, of approximately that magnitude.
Figures reflect historical data through 2025. Source: Slickcharts S&P 500 historical returns. Past performance does not indicate future results.
But what that number does not convey is how rarely any individual year comes close to it. The historical distribution is much wider than a steady 10% to 12% annual return assumption would suggest, with many years producing substantially larger gains or losses. If you are using that average to project your own portfolio performance, understanding the full distribution matters.
How Often Do S&P 500 Annual Returns Match the Historical Average?
When all 100 years of annual returns from 1926 through 2025 are sorted into a frequency distribution, the shape is striking. The largest single bar in the chart is the one that surprises most people: returns of more than +20 percent, which accounts for 38 of the 100 years. Negative years, while less common than up years overall, account for 26 of the 100 years: roughly one in four.
The bins nearest the long-run average tell a different story. The +10 to +15 percent range, which is the bucket the arithmetic average of 12.35 percent actually falls into, contains only 9 of the 100 years. The two adjacent bins, 0 to +5 percent and +5 to +10 percent, contain just 6 and 8 years respectively. The over +20 percent bin holds 38 years. The stated average sits in one of the histogram's thinner columns.
The year-by-year chart below plots each calendar year as an individual bar, ordered chronologically. This view makes it easier to trace how outcomes clustered during specific periods: the prolonged strength of the 1980s and 1990s, the back-to-back losses of 2000 through 2002, or the sharp single-year drop in 2008 and the immediate recovery that followed. The distribution view shows how often each return magnitude occurred; the year-by-year view shows when those outcomes arrived.
Use the year filter above to explore any time period; both charts update together.
Why Does the S&P 500 Average Mislead Investors?
The arithmetic average of a set of numbers is sensitive to extreme values. A sequence like -37% (2008), +26% (2009), -22% (2002), +29% (2003) produces an average that looks moderate and unremarkable, even though none of those four years was either.
This is not a flaw in how the average is calculated. It reflects a genuine property of the market's return history: extreme variation is what generates the long-run average, not a smooth approximation to it. If you stayed fully invested through every year in this dataset, you would have compounded your wealth at a historically strong rate. But you would have done it by living through the full distribution, including every year that looked nothing like the "average."
The distinction matters because your financial projections that assume a steady 10 or 11 percent return each year may look very different from projections that accurately represent the actual sequence of gains and losses.
Arithmetic average vs. compound return. The figure shown in the chart is the arithmetic mean: the sum of all annual returns divided by the number of years. The compound annual growth rate (CAGR), which measures what an investment actually grew at over the full period, is lower. The gap exists because losses hurt more than equal gains help: a 50% drop followed by a 50% gain does not return to the starting point; it leaves the investor 25% below it. This effect is called volatility drag, and it means the arithmetic average overstates what an investor actually earned on a dollar-for-dollar basis. Understanding volatility drag is particularly important when planning tax-efficient withdrawal strategies. The CAGR is a useful measure of the historical compound growth of the index over the period; the arithmetic average is useful for describing the distribution of annual returns.
How Does Return Dispersion Help Your Portfolio During Accumulation?
During the accumulation phase, regular contributions can make market declines less damaging to the effect of new contributions because the same dollar amount can purchase more shares when prices are lower. This is one of the mechanics behind dollar-cost averaging. When prices recover, those shares may participate in the rebound. This is one reason regular contributions can interact differently with market volatility during accumulation than withdrawals do during retirement.
The year-by-year chart above shows this pattern directly. Some sharp declines were followed by an immediate positive year; others preceded multiple consecutive down years before a rebound arrived. The timing and depth varied considerably across different eras. Exploring specific decades in the chart shows how different these sequences looked in practice.
This does not mean losses are acceptable or that downturns are beneficial—existing holdings lose value, and recovery is not guaranteed. Rather, the historical record shows that investors who stayed invested through the full sequence, including painful years, participated in eventual gains. This outcome required both staying invested and the specific experience of eventual recovery.
Past patterns do not guarantee future recoveries occur within any specific timeframe.
How Does Sequence-of-Returns Risk Affect Your Retirement Income?
The situation changes materially once you begin drawing down your portfolio rather than adding to it. You and another retiree with the same average return over a 20-year period can end up with dramatically different outcomes depending on when the large negative years occur.
If you experience a severe bear market in the early years of retirement, while drawing living expenses from a portfolio that has just declined significantly, and if the withdrawal is funded by selling assets that have declined, more shares or units must be sold to generate the same dollar amount. Those shares are no longer available to participate in a subsequent recovery, leaving fewer assets to compound if markets rebound. Your portfolio starts in a smaller position and compounds from a lower base.
This is the sequence-of-returns risk. It is one of the primary reasons your retirement income planning cannot rely on projecting an average return forward and assuming everything averages out. A comprehensive retirement plan can model a range of return sequences rather than relying solely on an average return assumption. When withdrawals are being taken, the order of returns can matter as much as the long-run average return.
Depending on an individual's circumstances, approaches that may help manage sequence-of-returns risk include:
- Maintaining a portion of your portfolio in lower-volatility assets in the early retirement years
- Building a near-term spending reserve so that your portfolio withdrawals can be reduced or deferred during periods of market weakness
- Considering a flexible withdrawal approach that adjusts your spending in response to portfolio performance
- Evaluating the timing and coordination of Social Security and other income sources to potentially reduce portfolio withdrawals during vulnerable periods
Understanding how you coordinate these factors is central to whether your retirement plan can remain better prepared for a range of market outcomes regardless of what any individual year delivers.
What the S&P 500 Histogram Doesn't Show
The frequency distribution of annual returns is a useful picture of the past. But it does not address several questions that are directly relevant to planning:
- Sequence: The histogram shows how often each return occurred, not in what order. Two eras with the same distribution can produce very different compound outcomes depending on when the losses fall relative to when withdrawals begin.
- Inflation: Nominal returns are shown. Real (inflation-adjusted) returns have historically been lower. The purchasing power of returns depends on what inflation was doing during the same period.
- Personal portfolio: An individual portfolio rarely mirrors the index perfectly. Asset allocation, international exposure, bond holdings, tax drag, and fees all affect the actual return experienced.
- Future: A century of historical data provides a substantial record for understanding the range of market outcomes. It does not mean the next century will look the same.
How to Use S&P 500 Average Return Data in Retirement Planning
The long-run average return of the U.S. stock market is not a prediction about any individual year. It is a description of what a century of extreme annual variation, including 26 negative years, has added up to when compounded over time.
Historical return distributions can help illustrate the range of outcomes a retirement plan may need to withstand, but they do not predict the returns that will occur in the future.
Understanding this does not change what the long-run average is. But it does change what your realistic financial plan looks like, particularly one designed to support a resilient retirement income approach through a period that may span 25 to 30 years.
A plan that assumes your returns will be steady smooths over the very dispersion that creates those returns in the first place. A plan that accounts for the full range of outcomes, and that addresses how your portfolio behaves when those outcomes arrive, can help remain better prepared for a range of market outcomes regardless of what any individual year delivers. That is the foundation of sequence-of-returns planning, and it is why coordinating your withdrawal strategy, tax approach, and asset allocation matters as much as the long-run average itself.