SWR 4%: An Investigation. Month 2.


It’s now two months into the experiment proper, a a long 3 months ago that Mr Z in Parallel Universe Number 1 went ballistic and pulled the trigger on early retirement.  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.

Each month I am going to assume that Mr Z has lived true to his word and spent every penny of his last paycheck and is ready to draw down once again from his retirement fund, bang on the end of the month.  With the drawdown being taken from the overweight allocations.

This should be prudent, as in reality you would cut back when the markets are down, you may have some months where you do a little bit of work and get a little bit of side income, you might not spend the full withdrawal amount, etc

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.

At the end of January the portfolio was up nearly £10k from the original £625,000, at £634,441.  Sitting pretty Mr Z

Where are we now (at 28/2/2015)
Let’s have a gander at where Mr Z’s portfolio would be, before any drawdown.
Mr Z had another good tail wind , leaving all but one of his positions up since the end of January.  His bond fund took a bit of a battering.  

Not much going on here;
– £183 in distributions from the UK Gov’t Bond ETF
– £42 in interest on his Cash ISA.
As the bond ETFis an income type, distributions end up being paid into his cash account.

Some big increases here and a big drop in the bonds.
  • +£5,272 on the Lifestrategy Fund
  • +£3,140 on the S&P500 ETF
  • +£2,290 on the FTSE100 ETF
  • +£2,087 from the Developed Europe ETF
  • -£4,452 from the UK Gov’t Bond ETF
So nearly a £9k increase over all, if every month was like this we’d never have to worry about running out of capital.
Following last months method, there are 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 out of his £2,083).  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.
With income going into the cash account, this should mean that part of the withdrawals will come from the cash position each month, unless there has been some huge movements elsewhere.
Asset Allocation – 28/2/2015 pre-drawdown
So Mr Z’s portfolio currently sits at 75.16% equity and 24.84% Bonds&Cash.  Looking at the weightings we can see that the Lifestrategy Fund and cash are overweight.
Therefore he will draw down a weighted amount from each of Lifestategy and cash depending on how overweight they individually are.
Lifestrategy is overweight by 0.23% and cash by 0.11%
Which are then weighted 67% and 33%
So the withdrawal will comprise £1,404 (67% of £2,083) from the Lifestrategy fund and £679 (33% of £2,083) from the cash position.  This brings us to the £2,083 he needs to withdraw each month,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;
– £1,405.55 from the LifeStrategy Fund (10 units)
– £677.78 from cash

The remaining portfolio
With Mr Z primed for another month following his withdrawal the portfolio looks like;
Portfolio after drawdown – 28/2/2015
Every position is actually up since the start, despite a couple of months of taking out a monthly withdrawal.  
What would you have done?  Left rebalancing until the end of the year?  Do you think Mr Z will start getting arrogant and think he is an investing wizard?
Mr Z

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