# Average returns versus CAGR for withdrawal plans

Ian Whiting

So here we are again, but this time we will look at the difference between Average rate and the calculated CAGR when there is a WITHDRAWAL plan in place. So again, same rate history and sequence as we have been using for the past several examples but now we start with \$1,000.00 and withdraw \$50.00 each year – as you can see the average is still 6.84% but the calculated CAGR required to get the same result after 20 years is now 6.14%. If you use the average rate of 6.84%, then the final result is HIGHER by \$293.79 or 22%. In this specific case, the use of the average rate produces what APPEARS to be a better result for the client – but it isn’t in terms of the reality – the figures appear better, but the actual results prevail of course! If the sequence of returns is reversed, then the resulting capital is ONLY \$577.92 – and the calculated CAGR is now way down to 3.73% – interesting to say the least!

Sequence of returns is absolutely critical for withdrawal programs as you can easily see. Using average rates is just unforgiveable and indefensible IMHO!

Year Rate————\$1,000.00
1992. . . .7.8 %__________\$1,024.10
1993. . . .-4.6 %__________\$ 929.29
1994. . . .29.0 %__________\$1,134.29
1995. . . .-2.5 %__________\$1,057.18
1996. . . .11.9 %__________\$1,127.03
1997. . . .25.7 %__________\$1,353.83
1998. . . .13.0 %__________\$1,473.33
1999. . . . -3.2 %__________\$1,377.78
2000. . . .19.7 %__________\$1,589.36
2001. . . . 6.2 %__________\$1,634.80
2002. . . .-13.9 %__________\$1,364.51
2003. . . .-14.0 %__________\$1,130.48
2004. . . . 24.3 %__________\$1,343.03
2005. . . . 12.5 %__________\$1,454.66
2006. . . .21.9 %__________\$1,712.28
2007. . . .14.5 %__________\$1,903.31
2008. . . . 7.2 %__________\$1,986.75
2009. . . -35.0 %__________\$1,258.89
2010. . . .30.7 %__________\$1,580.02
2011. . . -14.4 %__________\$1,309.70

Average. . .6.84 % \$1,603.49

CAGR. . . . 6.14 % \$1,309.70

So all of this is interesting to look at and consider, but next I am going to throw inflation into the issue and finally, some comments on taxation! So this is nice and short – if anyone wants to see a printout of the other tables showing the reversed sequence and the CAGRs, just email me! Cheers

The MONEY® Network