The terminal growth rate is only one of the many assumptions you make in a DCF valuation. However, the terminal growth rate has a huge impact on the valuation. So it is very important that you get this right.
The main guideline is that you want to reflect reality as close as possible. Also, err on the conservative side is good practice.
Most companies that you are valuing will be growing. With growing companies, you do have some boundaries. Your terminal growth rate should be lower than the growth rate of the economy in which you operate. This is because you maybe able to grow faster than the economy for a defined period but not into perpetuity.
Many practitioners feel the long-term growth rate of your company is also too optimistic, given we are talking about infinity! And so, many practitioners prefer to use the historical inflation rate.
A default option for many practitioners is a terminal growth rate of 3%. Given all this uncertainty, many practitioners default to a terminal growth rate of 3% and do a sensitivity analysis ranging from 0%-5%. Also, note that if you are valuing a company that is on the decline, your terminal growth rate can also be negative.