SWR 4%: An investigation. Month 1

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 Portfolio
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.

Pre drawdown asset allocation
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.

For example;
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
The portfolio is actually still a little overweight towards Bonds&Cash as it stands at 25.8% Bonds&Cash and 73.8% in Equity but less meddling and more living Mr Z.  Now go, be free.

Onwards and Upwards
A pretty good month there, and one I would be pretty happy with if it was my first month of living off my assets.  Let’s leave Mr Z to a month of frolicking away with his new found freedom in Parallel Universe Number 1 (I believe he is going to start keeping bees).

What would you have done?  Drawn more from bonds while they are up?  Left bonds alone and use the cash to draw from and rebalance at the end of the year? Or something else?
Mr Z

12 thoughts on “SWR 4%: An investigation. Month 1

  1. Living cheap in London

    I look forward to following this in the months/years ahead. I've got a growing chunk of my fun in the 80% Lifestrategy, & a bit more in the Vanguard UK FTSE tracker (this is to bring my overall portfolio slightly more UK base).

  2. Mr Zombie

    Excellent :). Hoping as time rolls on it will be a fairly interesting experiment.
    Similar to what I have at the moment as well, keep it simple and then leave it alone is the approach I am going for.

  3. ermine

    I'd advocate some sort of integration time to smooth this rather than running SWR month on month?

    The volatility of the stock market isn't going to be good for your older Self's blood pressure otherwise. OTOH it's an interesting philosophy to draw from bonds or stocks in proportion to their relative value. Maybe that gives you the smoothing you need – your experiment will show that (or your could back-test)

    With the old GAD rates system the amount was set and reviewed every three years. I don't know whether this is because they considered three years a good integration time or because doing it more frequency would make administration too expensive.

    It'll be interesting to see what happens!

  4. Cerridwen

    I'm another one who will be watching this with interest. Using the proportions of the drawdown to rebalance is a pretty tidy way of dealing with things.

    I'm getting quite close to needing to drawing out of my SIPP for real now and I'm trying to work out how best to manage this. Luckily it only has to last me 6 -7 years but that doesn't mean it will be any easier to get it right – especially if things really tank in year 1, 2 or 3. I'm considering switching to income funds and having the dividends paid out into a current account along side my cash fund and then supplementing that with selling the capital as I need to. Not sure. It all depends how things look in a couple of years and how the pension companies are prepared to let us take the money out which isn't clear yet.

    (btw many thanks for the link :-))

  5. Mr Zombie

    Hello emine,

    Thanks for the comment. I did think about smoothing from month to month, but decided against it in the name of simplicity… still not sure if that's the right decision. (Especially once it's set up it won't be any more complicated)

    I want to back test. I've done a bit of reading around the 4% SWR and some of the academic studies around it, but without actually doing it myself I think I miss the importance of certain assumptions that are made. I will do some sort of investigation myself, once I have some time. As these things, to me, only really make sense after playing around with the numbers and assumptions myself!

    Mr Z

  6. Mr Zombie

    Hi Cerridwen,
    I think you are right, there is so much uncertainty around where the industry is going at the minute, that the options available to us in a few years will probably be quite different to what we have now.

    If I keep it simple for now, then it is easy to see what is happening…

    No worries 🙂

    Mr Z

  7. Mr Zombie

    Hi Zee,
    Thanks for the comment. It will be good to see how it develops with a few simple rules in place. I half thought about running a few different scenarios to see how they stack up against each other. But then it would become quite a task!
    Mr Z


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