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
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.
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.
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.