SWR 4%: An ongoing thought experiment – October Update

Hope you all are having a great Monday, and not hung over like myself.  Turns out a Sunday night gig wasn’t a good plan.  Still, there’s not many things like a sweaty hardcore punk gig in a small local venue to keep you on your toes, and it’s nothing that a bit of camomile tea and spreadsheet work won’t fix.  From hardcore punk, to camomile tea, to some thoughts on the ongoing experimental portfolio.  A seamless intro.

The standard recap

Back to the beginning.  We are now ten 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.

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.

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, so no cash 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

The fund is very simple, 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, 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 we all got to deal with our curious nature and tendencies to meddle in things.  
Initial Position at 30/10/2015
Following on from prior months, first lets have a wee look at where the portfolio would be without anything withdrawn;
Things have picked up, from the rough month of September.

Equity is generally up, whilst bonds have retreated a little bit.  

A quieter month on the income front;
– £225 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 in the month and then any remaining withdrawal will be taken by selling capital, aiming to re-balance towards the 75:25 allocation with any dealing costs picked up by poor Mr Z himself.  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, rather than quarterly or annually, might not be the best option.  It exposes the intrepid Mr Z entirely to the volatility of the markets and the closing price on one fixed day.  Still, that’s how we started this.

The portfolio is very slightly overweight in the US S&P500 ETF and the government bond portfolio, when compared to our original target allocation.  
This results in 41 units from the S&P500 being sold (at £25.70 per unit), 6 units being sold from the UK Gov’t Bond tracker (at £21.13 per unit) and the remaining from cash.

The remaining portfolio after withdrawal
Following withdrawal the portfolio looks like;
Had we panicked back in September when the market was on it’s way down, gone into a selling frenzy to limit our losses, we would have missed out on nearly £22k of gains.  Not quite back to where we started, but we’re getting there.  

Some comparisons

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

This is my favourite graph.
The blue line is the experimental portfolio.  The purple line is the most aggressive allocation, with 100% in equities (the 100% equity LifeStrategy fund).  The straight line is just cash, earning interest and slowly running down, guaranteed to be exhausted at some point.  And the green is 100% invested in a government bond fund.
Things are pretty much like you’d expect, with the portfolios with a heavier equity allocation showing more volatility than those with a higher proportion in bonds or cash.  
After a large spread in September (£50k), all of these portfolios are coming back together (a £10k spread at the end of October), with the bond option being at the top at the end of October.  
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.  Things are looking brighter this month.
I think I will add the Vanguard High Yield ETF to the comparisons above, from next month.  It was yielding 3.43% at the end of September, so would offer a nice comparison.  One where the majority of the spending would hopefully be covered by the dividends.  Having a quick look at the fund and it’s distributions, if we had used the whole £625k to buy units of this fund it would have provided approximately £19k of income to date, which would have nearly covered all of our ‘income’ requirements of £2,083 a month.  Not a bad option, perhaps.

A summary of all the past months are here.

Mr Z

[If you want to do any reading on the 4% withdrawal rate, a recent(ish) post by the Mad FIentist is excellent.  Nicely aligned with my thoughts on it]

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

  1. M from There's Value

    really love these updates on the experiment. it just goes to show what might be a scenario for some of us in 10+ years' time!!! But as you say, in reality, we would probably do it a bit differently. I also think that I wouldn't need £2083 per month to live off… hopefully the old mortgage would be gone by the time I'm FI!!!


  2. weenie

    Your favourite graph is also mine! Very interesting to see how the portfolio's perform. I'm invested in the Vanguard High Yield ETF (as well as the FTSE 100 and the Government Bond one) so it'll be interesting to see how it compares.

  3. London Rob

    Hi Mr. Z,

    I hope the Monday hangover was really worth it 🙂
    Thanks for sharing again, its great to watch this as it develops overtime. I've also been toying with the idea of the Vanguard High Yield when I start a new ISA next year (diversifying to another provider), but time to think still there.

    Looking forward to the next update!
    London Rob

  4. Mr Zombie

    Hi LR,

    It was worth it…just.

    As an easy, cover all, ETF to get a bit more income from it does look like a good option. I'm pretty much just in the All World ETF at the moment (apart from the monkey stocks 😉 but I have been thinking along similar lines as you.



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