A quick recap
Well, well. It was 2 months ago that Mr Z in Parallel Universe Number 1 went ballistic and pulled the trigger on early retirement and 1 month ago that he received his last paycheck. This is a completely fictitious portfolio and just a little experiment for me, hopefully giving some insight on what it would actually be like living through the ups and downs of living off an investment portfolio.
He has lived true to his word and spent every penny of his last paycheck and is ready to draw down from his retirement fund. At the start of this experiment the fund was £625,000, enough to withdraw £25k a year (and increase this annually along with inflation) if the 4% Safe Withdrawal Rate is to be trusted.
Where are we at
Let’s have a gander at where Mr Z’s portfolio would be, before any drawdown.
|Mr Z’s retirement portfolio|
Mr Z had one hell of a tail wind in January, leaving all but one of his positions up since the end of December. The yields on bonds have been pushed downwards and he has been in a position to benefit from a large capital gain off the back of this. Lucky man.
Not much going on here;
– £238 in distributions from the UK Gov’t Bond ETF
– £42 in interest on his Cash ISA.
As the ETF is an income type, these will just end up being paid into his cash account.
Some large increases here, well played Mr Z, and congrats on not getting rattled earlier in the month when markets were all over the shop.
- +£4,224 on the Lifestrategy Fund
- -£62 on the S&P500 ETF
- +£2,219 on the FTSE100 ETF
- +£1,910 from the Developed Europe ETF
- +£6,115 from the UK Gov’t Bond ETF
I have defined some mechanical rules for Mr Z to follow, based on the initial asset allocation of 75% Equity and 25% Bonds&Cash.
Essentially all that will happen is the portfolio will re-balance towards this 75:25 allocation at the end of each month (with any dealing costs picked up by poor Mr Z himself). This should then skim off any parts of the portfolio that are doing well and hopefully give any flagging parts of the portfolio catch up.
|Asset Allocation at 31/1/2015 before any drawdown|
So Mr Z’s portfolio currently sits at 73.9% equity and 26.1% Bonds&Cash. Tut tut, he is overweight in Bonds&Cash.
Therefore he will draw down a weighted amount from each of bonds and cash depending on how overweight they individually are.
Bonds are overweight by 0.92% and cash by 0.19%
Which are then weighted 83% and 17%
So the withdrawal will comprise £1,724 (83% of £2,083) from bonds and £359 (17% of £2,083)
To total the £2,083 he needs (i.e. £25,000 per year divided by 12).
With a bit of rounding and a slight adjustment to sell a whole number of units we actually see withdrawals of;
-£1,722.49 from bonds
– £360.84 from cash
The remaining portfolio
With Mr Z primed for another month following his withdrawal the portfolio looks like;
|Portfolio after drawdown – looking positive|