SWR 4%: An ongoing thought experiment – September Update

The standard recap

Back to the beginning.  It’s now a whole nine 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 real.  So don’t panic.
Each month I assume that Mr Z has spent every penny of the prior month’s drawdown and is ready to drawdown once again from his retirement fund at the start of the month, with no surplus left over from the prior months.  And he will do this whatever the financial weather, there will be no buckling down the spending hatches if the markets go a bit Norman Bates or spooging a bit more cash in the good times.

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.

The fund is very simply built, and the allocations to the various ETFs were almost done at random, large world, UK or US trackers.  This isn’t supposed to be a test of asset allocation or the 4% rule or any kind of detailed back testing.  Think of it more as a thought experiment, would you be able to trust your strategy when things turn south?  Chopping and changing strategies, constantly trading, only ever seems to be bad for portfolios in the long run…but perhaps there does come a point where it’s time to change your strategy?  
Initial Position at 30/9/2015
Following on from prior months, first lets have a wee look at where the portfolio would be without anything withdrawn;



Another month of substantial drops in the market, sending the equity portion south.  Bonds and cash are holding the fort, just doing what they were bought to do.  Overall there has been an £11k drop, nearly 2%.  It is sure easier to stay equities friends when they are climbing like for the last few years, at the moment they are just acting all cray-cray.  Ryan thinks we shouldn’t be worried.

Income
Some quarterly income fun inbound;
– £579 from a quarterly distribution by the S&P500 tracker
– £969 from a quarterly distribution by the FTSE100 tracker
– £293 from the Developed Europe tracker and it’s quarterly distribution (keep up Europe)
– £178 in income from the U.K. Government Bond UCITS ETF
– £42 in interest on a Cash ISA.
Dividends or interest are assumed to be paid into the cash account before we look at any withdrawal.
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.


Doing this every month might not be the best option, exposing our intrepid Mr Z entirely to the volatility of the markets and the closing price on one fixed day seems a little unfair.  Still, that’s how we started this.

With all equity funds taking a hit, the withdrawal is taken from the relatively overweight bonds and cash.

This results in 1 whole unit being sold from the UK Gov’t Bond tracker (at £21.43 per unit) and the remaining from cash.

The remaining portfolio after withdrawal
Following withdrawal the portfolio looks like;
Well, well.  Another month, another dropping portfolio.  
Helpful to breakdown the movements this month;

Shows the fund value at each step.  Equity causing havoc and pushing the value southwards, and slightly more dividends this month to fund the majority of the withdrawal.


Some comparisons

Let’s have a quick gander at where we would be with some other fund choices.

The blue line is the experimental portfolio, down towards the bottom at September.  Things are as you’d expect, it’s generally following the markets south.  If it had been 100% in the LifeStrategy 100% equity fund we would be nursing a few more wounds and if we’d been all in a government bond fund we’d actually be up on where we started.  
For all the worrying about asset allocation we would have currently been better off being 100% in cash, but that is a guaranteed bet, guaranteed that in the long run the money will expire, perish, decease and generally wither away.  I don’t like those odds much.  If we carried on with the same interest rate and the same withdrawal rate (not even accounting for the need to increase our withdrawal amount due to the sneaky bastard that is inflation) the fund would be depleted in less that 31 years from now.  Admittedly, a glorious 31 years…
But it’s a long term game, and if the statistics are to be believed, the equity proportion should out perform cash and bonds in the long run, unless of course we take an initial pummelling and never recover.
If it looked like the portfolio had dropped a cylinder last month, it looks like things have got worse, poor Mr Z has picked up a fuel leak as well.  Hang in there buddy, I’m sure things will get better, although a recent post by FS suggests October might also be rough.  Who knows, maybe my actual portfolio will be crossing swords with this one sooner that I thought.

Mr Z

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

  1. M from There's Value

    I'm thinking FS is wrong, October will be fantastic…

    Anyway more importantly, very interesting to see what happens with this portfolio on a monthly basis. This could be us in a few years' time! I don't like this losses, but in reality I'd probably have 1-2 years' with of cash buffer in addition to the £625k. Plus I'd also still divide my income similarly to now and thus still be investing whilst living off the dividends and interest.

    Cheers

    Reply
  2. London Rob

    Fascinating reading again to see how this plays out – keep it up! I am going to be really interested to see how this keeps panning out – I am just enjoying the bumps as I am mostly in equities as well, but I am in accumulation phase!
    Thanks 🙂

    Reply
  3. London Rob

    Hi MrZ,

    Thats the reason I am loving this thread. I'm trying to imagine "what if this was me" in it, could I cope? I've had my net worth fall over the last minor blip, and it didnt worry me – but putting myself in the imaginary position above is interesting. At the minute I dont think I would be, however if it keeps going down then I think I might be!

    Cheers for keeping it going!

    Reply

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