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Monday, January 17, 2005


Total Return is Relevant in Accumulation Phase Only

When one is accumulating funds in IRA, 401-K, 403-B, 457, 529, ...or private accounts, total return is relevant. All distributions (dividends, capital gains) are reinvested. Periodic contributions take advantage of time and price diversification through dollar cost averaging (DCA).

People then confuse total returns with what happens during systematic withdrawal plans (SWP). If an account is withdrawn at historical total return rate, the account WILL BE DEPLETED in fairly short time span. Safe withdrawal rates are not some simple fraction of total return, nor some fixed discount from the total return.

However, one observation is that for conservative balanced accounts (60% stocks, 40% bonds), very long term total returns are ~ 10%, and safe withdrawal rates for life span are ~ 5%.

But, this does not hold at all for aggressive all stock accounts.

Financial press does not provide helpful data for withdrawal phases.

One reason is that safe withdrawal rates are not easily related to any typical performance statistics. Monte Carlo simulations are needed to determine safe withdrawal rates for a particular set of investment allocation.

I wish that all published total return performance data came with a federally mandated disclaimer that if you are a retiree, or a person living on periodic investment withdrawals, relying on total returns can be harmful to your financial health.


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