# Average returns versus CAGR for withdrawal plans

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

#### Ian Whiting

Ian R. Whiting CD, CFP, CLU, CH.F.C., FLMI (FS), ACS, AIAA, AALU With more than 40-years of experience in the industry, Ian has qualified 3 times for MDRT, completed LUATC in 1979, the LUAC Financial Planning Skills Course and attended numerous Schools in Agency Management and Sales Management through LIMRA. He obtained his CLU in 1987 while also completed his IFIC qualification and completed his Fellowship in the Life Management Institute with a specialty in Financial Services in 1988. In 1989, he completed qualifications for his Chartered Financial Consultant designation. In 1992, he qualified as an Associate of the Academy of Life Underwriters (Head Office underwriter qualification) and in 1993 he completed his Associate, Customer Service designation program through LOMA. In 1997, he qualified as a CFP and also completed his courses and exams to obtain the Associate, Insurance Agency Administration designation. In 1999, he completed the study and examinations to qualify as a Trading Officer, Partner and Director for Mutual Funds with the BC Securities Commission. As a result, he is also qualified as both a Branch Compliance Manager and Head Office/Provincial Compliance Officer. He served for nearly 18 years with the Canadian Forces (Air) Reserve (reaching the rank of Captain) primarily working with Air Cadets and was award the Canadian Forces Decoration (CD) in 1982. Long known as a maverick and forward thinker in the financial services world, Ian enjoys the challenge of learning new material and planning for the future evolution of his chosen profession.