SWR 4%: An Investigation. Month 3


It’s now three months into the experiment where Mr Z in Parallel Universe Number 1 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 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.  The drawdown is assumed to be 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.

Where are we now (at 31/3/2015)
At the end of March the position of Mr Z’s portfolio before any drawdown, would be;
Mr Z had yet another good tail wind, leaving all but one of his positions up since the end of February and a few distributions at the end of Quarter 1 have provided a nice boost to the cash position. 

Quite a few distributions were paid out for Q1 from the various index funds.
– £564 in distributions from the US S&P 500 ETF (VUSA)
– £775 from the FTSE 100 ETF (VUKE)
– £289 in distributions from the Developed Europe ETF (VEUR)
– £177 from the UK Government Bonds ETF (VGOV)
– £41 in interest on his Cash ISA.
All of the funds are the income type and so distributions are assumed to be paid into the cash account.

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.

Any distributions will be taken directly and then any remaining withdrawal will be taken to re-balance towards the 75:25 allocation 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 while avoiding drawing on capital unnecessarily.

Asset Allocation predrawdown as at 31/3/2015

So Mr Z’s fictitious portfolio would sit at 75.07% equity and 24.93% Bonds&Cash.  

Including the income on the Cash ISA there was a total of £1,845.45 in distributions in the month, so leaving £237.49 left to distribute.

Therefore he will draw down a weighted amount from each of Lifestategy, S&P 500 and cash depending on how overweight they individually are.
With a bit of rounding and a slight adjustment to sell a whole number of units we actually see withdrawals of;
– £143.19 from the LifeStrategy Fund (1 units)
– £79.91 from the S&P 500 ETF (3 units)
– £14.38 extra from cash

The remaining portfolio
Following withdrawal the portfolio looks like;

Portfolio after drawdown – 31/3/2015

Every position is actually up since the start apart from the FTSE 100 ETF which is pretty much even.

It’s worth remembering that at this point there have been 3 month’s worth of withdrawals.  So £2,083.333 * 3 =  £6,250 has been drawn down in total and the position is still significantly up since starting this experiment.

When I initially set this up I spent about 30 minutes choosing the asset allocation and the actual funds for investing in (all of which are Vanguard).  I didn’t want to get too involved in fund selection or asset allocation at that point, just a simple 75% equity and 25% bond/cash split and go from there.  

So what has Q1 taught me?  That Mr Z is flying along nicely in his parallel universe, but this is all due to upwards movement in the global market place, nothing fancy to do with portfolio design.  So that could easily go the other way.

When things do (and they will) turn south I’m hoping that there will be enough in bonds and cash to reduce the overall volatility and to weather the storm.  At the moment there is about £162k in bonds and cash, which is approximately 6 and a half years worth of expenses.  But that will be eating directly into capital, so we’d hope that our equity would bounce back when this happens.
With a lot of chirp in the press at the moment about an imminent crash I wonder if I would be strong enough to trust my asset allocation at this point and sit with such a large portion exposed to the market.  Who knows?  But I do know that Mr Z in the parrallel universe has no choice and he will plow on regardless.
Best of luck old chap.
Mr Z

4 thoughts on “SWR 4%: An Investigation. Month 3

  1. Retirement Investing Today

    Hi Mr Z

    I'll be very interested to see how this plays out over the long term. I'm also doing something a little similar but only post an update every year. The next one for me is due in July.

    From our posts and cross comments I think I'm more of a glass half empty person than yourself. With this in mind I let my fictitious retiree retire on the 31 December 2006 and we all know what kicked off in 2007. I'm running a few scenario's including 4%/3%/2% SWR draw downs, 25:75/50:50/75:25 allocations and index linked/normal gilts portfolios.

    As of July 2014 Mr 4% was in serious trouble with between 14% and 25% of portfolio value already lost. Mr 3% was a down between 5% and 16%. Mr 2% was between 4% up and 6% down.

    This experiment plus the Pfau work which I think we've commented on before are 2 reasons why I've personally chosen to go with an SWR of 2.5% (plus investment expenses of around 0.25%).


  2. Mr Zombie


    That's some scary numbers, 25% loss, will be interesting to see how much that will have recovered by July! (if at all).

    I will have a read of your experiment as sounds interesting, retiring prior to the crisis is a 'worst case' but also still distinctly possible.

    It does strike me that while investing, especially along the passive route, there is a huge weight placed on not trying to time the market, which I agree with. But you will have to "time" the market at some point when you decide to retire…like you mentioned in your post on the subject.

    I think with a good few years to go for myself it's easier to see 4% as reasonable, but in all likelihood I suspect my expected WR will reduce. Perhaps it's a psychological thing at the moment, a higher WR makes FI more probable. That said, in all my projections I don't take into account bonuses or promotions as they are discretionary, so it probably offsets a little.

    Mr Z

  3. Mr Zombie

    Hi M,

    Thanks. It is interesting, and at the moment it seems like a great idea as everything is rosy.

    Will be interesting to see what it is like when things head South.

    It also makes you think that some side income doing something that you really enjoy wouldn't go amiss, even if it was only a few £100 a month.

    Mr Z


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