Retirement Planning With The 'Tism - Part 3: Why Average Returns Don't Mean What You Think
Almost like there is more than one average, and your portfolio gets the lower one?
We are back to talking about retirement planning. Projecting out investment returns is something I do in my career,
We started the week with a post explaining different measures of central tendency. Now you know the difference between arithmetic & geometric average and you know to use a geometric average.
You also know that if someone quotes an arithmetic average and uses it for projecting out account values…RUNNNN. Dude is going to steer you wrong.
And now that we establised that you need to take the geometric average when projecting the growth of a starting value over time. We are going to address how you 100% can not take the geometric average when projecting the growth of a portfolio receiving contributions over time. (Hint, you need to account for the different contribution timings and take a weighted return of the money coming in)
[Note - Since I want to be clear, you absolutely should be investing every month. This post is assuming you are already doing that. It is not to discourage you from investing. You NEED to be saving and investing.
The purpose of this post is to inform you so you invest MORE. All these tweets make it seem too easy because the mafs are wrong. The goal is to invest so much that you ‘make it’. You hit that sweet amount where you literally can’t run out of money living your life. If you try to play it cute, you are leaving your retirement success up to the markets. (and we will show how that is rolling the dice that you were born in the right year).]
Want to get caught up on the rest of the “Retirement with the ‘Tism” series?
Part1 - We showed 2 common saving rules and why the 10% rule and 50/30/20 both likely leave you short.
Part2 - We Tackled the 4% Withdrawal Rule and why it likely isn’t enough no matter how much you yell FIRE in a crowder twitter-theater