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Rates of return in retirement calcs
Old 03-26-2009, 06:25 PM   #1
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Rates of return in retirement calcs

Whenever someone quotes an expected equity rate of return in their retirement calculations, does that include dividends? I have a detailed Excel sheet and for equities for my taxable accounts I am forecasting a 4.5% return and on non taxable accounts I'm forecasting 6.5% . My equities yield around 3.5% in dividends. Should I then forecast 6.5 + 3.5 for a 10% yearly return or is it assumed that the 6.5% or whatever number you use includes dividends? I think generally they do not. If equities have historically yielded 8% or so, then with dividends should we not expect over a 10% return over the long term?
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Old 03-26-2009, 07:28 PM   #2
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Quote:
Originally Posted by accountingsucks View Post
Whenever someone quotes an expected equity rate of return in their retirement calculations, does that include dividends? I have a detailed Excel sheet and for equities for my taxable accounts I am forecasting a 4.5% return and on non taxable accounts I'm forecasting 6.5% . My equities yield around 3.5% in dividends. Should I then forecast 6.5 + 3.5 for a 10% yearly return or is it assumed that the 6.5% or whatever number you use includes dividends? I think generally they do not. If equities have historically yielded 8% or so, then with dividends should we not expect over a 10% return over the long term?
Ordinarily these return assumptions do include re-invested dividends, often quarterly. Just see if your source for your number does or does not.

From what you have said, I would guess that it probably does.

Ha
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Old 03-26-2009, 08:39 PM   #3
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Agreed,
All the studies that I have seen or used are built on total return, meaning capgains and dividends or yields on the various asset classes are included.
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Old 03-27-2009, 12:10 PM   #4
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A harder question is how do you calculate your rate of return on an
IRA, for example, when you take RMDs during the year?

My crude way of doing this is to subtract the end-of-year balance
from the beginning-of-year balance, add back withdrawals and divide
by the beginning-of-year balance.

This is just an approximation. I think Swedroe or Burnstein may have
provided a better formula in one of their books.

Cheers,

charlie
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