It’s now a whole four 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 drawdown and is ready to drawdown 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
A quiet month;
– £240 from the UK Government Bonds ETF (VGOV)
– £44 in interest on a Cash ISA.
All of the funds are the income type and so distributions are assumed to be paid into the cash account before we look at withdrawal.
We will follow some mechanical rules, 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.
|Pre drawdown at 30 April 2015
So Mr Z’s fictitious portfolio would sit at 75.28% equity and 24.72% Bonds&Cash.
Including the income on the Cash ISA there was a total of £283.62 in distributions in the month, so leaving £1,799.71 left to distribute.
Therefore he will draw down a weighted amount from each of Lifestategy, FTSE100, FTSE Developed Europe 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;
– £430 from the LifeStrategy Fund (3 units)
– £31 from the FTSE100 ETF (1 unit)
– £454 from the FTSE Developed Europe ETF (20 units)
– £933 extra from cash
It is around here that I start to think that a mechanical strategy is all well and good to remove stupid emotions from your drawdown strategy, but would you really sell 1 unit of a fund to generate £31, probably for a £10 fee. Unlikely. Under the guise of keeping this simple, I will let it slide and continue assuming that all of the charges are picked up as part of Mr Z’s outgoings. Still, that would be £30 of potential charges from the above. That’s a bottle of whisky each month Mr Z is missing out on.
The remaining portfolio
Following withdrawal the portfolio looks like;
|After drawdown at 30 April 2015
Although the month itself wasn’t great, every position is with the exception of the government bonds fund is up since the start of the experiment.
As ever Mr Z in the parallel universe has no choice and he will plow on regardless, spending £2,083 each and every month and ignoring the markets. Things are looking pretty rosy, the overall fund is up nearly £17k and he has taken out just over £8k. To top things off he is due more than £2.5k of income from the LifeStrategy fund at the end of May. Happy days.
I do wonder if I would be conscious of every penny I was spending and paranoid about running out of capital. A little bit of paranoia is probably ok, right?
Best of luck old bean.