While munching on a bacon sandwich and sucking down some tea I was pondering the 4% withdrawal rate. Would I be brave enough to trust it?
Lets rip through the fabric of reality into a parallel universe (where creepily the markets are exactly the same). Mr Zombie has spent less, saved more and has come to the conclusion that now is the time to escape the Horde and become Financially Independent.
Having decided that he trusts the 4% rule and that £25k a year is plenty for a nice lifestyle, this would mean he has amassed a healthy £625,000 (in today’s money).
On the 30th of November 2014 he gave the middle finger to The Man, handed his notice in, panicked, sweated, tried to get his job back, realised he shouldn’t have called his boss what he did and then finally settles into working his notice period.
So let’s follow the Mr Zombie of Parallel Universe Number 1 and see how he gets on.
In Parallel Universe Number 1 Mr Zombie doesn’t want to spend much time at all managing his investments and so has chosen the following portfolio, (It’s just a coincidence that makes it easier for me than an equity portfolio and a bond ladder :).
|Mr Z portfolio: Z-Day|
Share Fund and ETFs
A selection of Vanguard products, with a lifestrategy fund for diversification and then some other ETF’s focussed on Europe and the US.
This is 75% of the total.
All details have been taken from the Vanguard website.
Bond ETFs and cash
The total takes us to 25%. This should reduce volatility of the fund, but with Mr Z gaining FI early he’s going to need some growth in his portfolio, so I aimed for a 25:75 split in cash:equity. Too aggressive or not aggressive enough?
The cash I have assumed is in an ISA, the post office one currently gives 1.55% interest for 18 months.
There is over a years worth of cash and over 6 years of bonds plus cash, which should hopefully be enough if poor old Mr Z suffers a market crash and has to wait a while for investments to recover.
I am not entirely sure how our parallel Mr Z will withdraw money from his financial nugget he has accumulated. The funds have annual, quarterly or monthly distributions and so this will provide part of the income. The remainder will need to come from capital withdrawals.
I will try to come up with some mechanical rules and just let it run itself 🙂
Any taxes or fees will just come from the drawdown each month, not the remaining capital, to keep things simple.
The drawdown will increase by inflation each year.
Time to fly bobby
Now jump back to our universe, one of the infinite in the multiverse. Just don’t go to the one where Mr Zombie is £’000s in debt and on the run from the police.
This is just an exercise of interest, so appreciate the portfolio isn’t great and perhaps not representative of what would be done in reality. But lets unleash Mr Z in Parallel Universe Number 1 to the whims of the markets and see how he gets on. Go now Mr Z, be free, be FI and let’s see how long you last.
Mr Z (the real one)