SWR 4%: An ongoing thought experiment – August Update


Back to the beginning.  It’s now seven 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, hopefully giving some insight on what it would actually be like through the ups and downs of living off an investment portfolio.  Nothing rea
Each month I am going to assume that Mr Z has 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.

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 split 75% to equity and 25% to cash and bonds.  That should be enough to withdraw £25k a year (and increase this annually along with inflation) if the 4% Safe Withdrawal Rate is to be trusted.

Initial Position at 31/8/2015
Following on from prior months, first I’ll have a wee look at where the portfolio would be without anything withdrawn;

Big drops in the market sending the equity portion south, bonds and cash just doing their thang.

Not much this month;
– £228 in income from the U.K. Government Bond UCITS ETF
– £43 in interest on a Cash ISA.
All of the funds are the income type and so dividends or interest are assumed to be paid into the cash account before we look at any withdrawal.
Mechanical rules are followed to simplify things, based on the initial asset allocation of 75% Equity and 25% Bonds&Cash.

Distributions will be taken first as income for the month 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.

This would result in 6 units being sold from the S&P500 tracker, 39 from the government bond fund and the remaining from cash.

The remaining portfolio
Following withdrawal the portfolio looks like;

Well, well.  The test portfolio is in it’s worst position it’s been in.

Helpful to breakdown the movements this month;

Shows the scale of the months volatility compared to the income and withdrawal.  I’m sure things will bounce back.

Withdrawal Rate
I didn’t start this to prove or disprove the 4% withdrawal rate, or anything in between.  It’s not supposed to be anything clever, no statistical analysis, so fancy modelling, nothing like that.

Just a simple thought experiment really, would you be stoic enough to leave the market to it’s things and relax into your Financial Independence?  Would you have half an eye on getting back into the workforce all the time, constantly worried about your portfolio running dry?  How would you be feeling with nearly a years worth of withdrawals seemingly wiped out in one month?  Not great and perhaps wishing you’d stuck the whole portfolio in cash, and not 75% in equities.

The power of foresight sure would be a nice thing to have and it’s a shame all those psychics don’t use their powers to predict what the markets will be up to.  But using my crystal ball I can see that the markets haven’t recovered yet…looks like Mr Z will be flying low for a while to come.  Stick to your guns.

Mr Z

4 thoughts on “SWR 4%: An ongoing thought experiment – August Update

  1. FIbrarian

    I'm the same boat as yourself Mr Z. My investments are in index trackers and my original early retirement plan was drawn up with the 4% rule in mind. There have been a couple of articles recently, especially the one on Monevator, that have made me pause for thought on whether I'm being a bit too naive in trusting the 4% rule to carry me through ER.

    The last thing I want is a 30+ years of retirement where I'm constantly checking my account balances and being left terrified at every market move. Like you point out the truth is is you're invested in equities your portfolio will lose value at some point, that's inevitable. I plan to continue earning small bits of income on the side in ER so if use the 4% as an absolute maximum and keep my spending flexible depending on the conditions at the time I'm confident I can weather whatever storms Mr Market throws my way.

  2. London Rob

    I have to say I am loving this to see what is happening, and also put myself in the position of "What if this were me?". I would like to think that I would be stoic about it, however I would be worried that I am having to sell things to keep afloat…
    My perfect solution (which I wont do unless I wait to 65 which sort of defeats this whole FIRE thing!) would be a couple of years in cash (3 ideally) that I eat out of, and then the rest is dividend, which hopefully 50% can get reinvested and 50% keeps my cash reserves up.
    Sadly, this means I need double the size pot!
    I will continue to watch with interest!

  3. M from There's Value

    Still loving this ongoing experiment. I also hope that I'd be stoic too, but if also hope that all my eggs are not on one financial basket too. Part of my FIRE plan is to have other forms of passive income e.g. an online business, p2p lending, and potentially some property letting.


  4. Jim McG

    Well, I'm supposed to be living the ERE dream and I chuckled ruefully when you asked the question above about how you'd feel seeing a year's worth of withdrawals being wiped out in a month? For me, I'm now finding myself reading the Situations Vacant pages with a bit more interest and practicing flipping burgers in the kitchen. Just in case. And would you like a large fries with that?


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