Safe Withdrawal Rate Experiment – Month 17 – May 2016

The markets during May have felt like they have slowly ticked up upwards, despite concerns over the Brexit.  Let’s have a look at how the safe withdrawal rate experimental portfolio got on. 

The standard recap

We are now 17 months into my experiment, where Mr Z in Parallel Universe Number 1 pulled the trigger on early retirement.  This is a completely fictitious portfolio. It will hopefully give some insight into what it would be like living off investments, through the ups and downs that the markets provide.  So actually being Financially Independent and living off investments.

At the start of the experiment, the end of November 2014, the investments totalled £625,000 and was split 75% to equity and 25% to cash/bonds.  Which represents a fairly aggressive equity allocation for someone in ‘retirement’.  

£625k should allow a ‘safe withdrawal’ of £25k a year (which then increases annually along with inflation) if we follow the 4% Safe Withdrawal Rate.  4% of £625k = £25k.

Each month let’s assume that the prior month’s drawdown has been completely spent.  And that this will happen whatever the financial weather, there will be no buckling down the spending hatches if the markets go into a kamikaze nose dive or equally splurging on new biros and fancy tea bags in the good times.  Luckily, that keeps things simple.

The allocation between ETFs, Funds and cash is very simple.  This isn’t a test of asset allocation, rebalancing, the ‘4% rule’ or any kind of detailed back testing.  Think of it more as an ongoing thought experiment, would you be able to trust your strategy when things turn south?  Failure or success of this one isolated case is so very far from testing the actual robustness of the 4% rule and this shouldn’t be taken as such.  Chopping and changing strategies, constantly trading, only ever seems to be bad for portfolios in the long run…but we all have to deal with our curious nature and tendencies to meddle in things.

Initial Position at 31/05/2016

Let us start by looking at where the portfolio would be without any withdrawals, just market movements and income;

May 2016 - Safe Withdrawal Experiment

May 2016 – Safe Withdrawal Experiment – Prior to withdrawal

Another volatile month, bouncing back up from the relative low in April of £614k to a smidgeon over £625k.  What, no growth over 17 months?  No, but remember that we have been withdrawing just over £2k every month.

Income

May gives us the annual distribution from the largest holding, the Vanguard LifeStrategy 100% fund;

  • £3,502 in dividends from the Vanguard LifeStrategy 100%;
  • £166 income from the U.K. Government Bond UCITS ETF; and
  • £38 in interest on a Cash ISA.

A total of £3,706 in income for the month, that’s a healthy amount of income.  The government bond ETF and the cash ISA have been reliably providing around £200 of income each month, enough to cover the months groceries perhaps.  But it is the quarterly or annual distributions from the equity holdings that provide substantial income.

Cashflow management is a big part of living off a portfolio.  If you don’t receive enough income in the month, or don’t have enough liquid assets, then you might need to sell assets at an inopportune time.  I.e. when their prices are depressed.  Equally, if you are too conservative and sit on too much cash and bond like instruments then you will probably miss out on the ‘real’ growth that equity and property type assets tend to offer.

My initial thoughts when setting this up was a 75/25 split between equities/bonds&cash.  That was on the basis that portfolios with a higher equity holding tended to fair better in the long run, but 25% of cash&bonds would provide about 5 years of drawdown in the event of a substantial market depression.  Giving the equity part of the portfolio time to recover.

The Mighty Withdrawal

We’ll follow simple mechanical rules, based on the initial asset allocation of 75% Equity and 25% Bonds&Cash.

Any distributions will be taken first, as income.  Then any remaining withdrawal will be collected by selling capital, with an aim to re-balance towards the 75:25 allocation.  Any dealing costs picked up by poor Mr Z himself.  

This will mean that the parts of the portfolio that are doing well are sold, and any flagging parts of the portfolio are given a chance to recover.  

Doing this every month, rather than quarterly or annually, might not be the best option.  Firstly, it will incur dealing costs every month.  Secondly, it exposes the intrepid Mr Z entirely to the volatility of the markets and the closing price on one fixed day at the end of the month.  Still, that’s how we started this.

At the end of May we don’t need to sell down any capital, on account of the substantial distributions received in May.

Following cash withdrawal of £2,106 the portfolio totals £623k, that’s only £2k down compared to where we started and £9k up from April.

Let’s have a look at the historic values of the portfolio, and include the same portfolio but with no withdrawals for comparison;

Safe Withdrawal Rate

May 2016 Safe Withdrawal Rate Experiment

OK, so the portfolio is £2,000 down from where we started over a year ago.  But we should really be adjusting for inflation, which is what the swanky new green line does (taking monthly ONS inflation data).  £625k is now equivalent to £635k thanks to inflation.

If we hadn’t been taking anything out, the portfolio would be at £657k now, a 5.1% increase over 16 months.

Some comparisons

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

May 2016 Safe Withdrawal Rate Experiment

May 2016 Safe Withdrawal Rate Experiment – Comparison to alternative fund choices

The test portfolio and the option of simply going 100% in the LifeStrategy100 fund are still heading along a freakishly similar path.  Not surprising given 30% of the portfolio is made up of that fund, still, simplicity is always a good option.

The All-World High Dividend Yield ETF option, which might have seemed like the obvious choice, is still having a rough time out there.

The option of all in bonds is still flying along, with a seemingly strong correlation to equities at the moment.  With a few more months data I plan to look at the impact of starting the experiment in different months, should give us a nice intro into the murky world of sequence of returns risk.

A summary of all the past months of the safe withdrawal rate experiment are here.

Happy Monday all.

Mr Z

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8 thoughts on “Safe Withdrawal Rate Experiment – Month 17 – May 2016

  1. London Rob

    Hi Mr. Z,

    Once again a huge thanks for pulling this together and keeping it going – it really is a fascinating read (or maybe I am a bit of a geek…). Its also great to see the split of the other portfolios – I’ve been adding the VHYL to my portfolio simply as I was down on ETFs and my broker was giving a zero commission deal in May so I could pound cost average over the month at no cost 🙂

    I have to be honest, I am still surprised to see that the starting value to now is so little changed given how much has been pulled out – this is especially poignant for me, as you closely match what I thought I would have in retirement – 80% equity, 20% bonds.

    Keep it up – its great 🙂
    LR

    Reply
    1. Mr Zombie Post author

      Thanks LR – always good to know it is of interest 🙂

      It is proving interesting, the portfolio is chugging along nicely. The 100% bonds option and VHYL are both surprising! Maybe time will sort them out…

      Mr Z

      Reply
  2. weenie

    Thanks for the update as ever, Mr Z.

    I agree with LR – I thought drawdown would have a much bigger impact in reducing the value of the portfolio than it actually has.

    That gives me some hope! 🙂

    Will be interesting to see if Brexit (or not) has any kind of effect.

    Reply
    1. Mr Zombie Post author

      Morning Weenie! Brexit is going to be interesting, maybe even offer up some bargains?
      Mr Z

      Reply
  3. ZJ Thorne

    Count me as one who is relieved to see the visuals and accompanying explanations about the impact of draw-downs. Thank you for continuing on this experiment for us.

    Reply
    1. Mr Zombie Post author

      Thanks ZJ 🙂 Sometime I literally can’t understand things without a drawing or a graph!
      Mr Z

      Reply
  4. theFIREstarter

    Mr Zombie!

    Massive kudos to you for keeping this going. It’s the sort of thing I’d think of as a great idea and forget about after 3 months.

    It’s also the sort of thing that becomes more valuable with each update you do. Just think in 5 years time this could be a legendary source of info for wannabe retirees out there!

    Which is all to say, keep up the good work 🙂

    Reply
    1. Mr Zombie Post author

      Thanks TFS 🙂 – I know if I miss one month then it will stutter to a halt, got to keep it up.

      Completely agree *if* I do keep it up for another year or so then it is going to get really interesting!

      Legendary would be amazing!

      Mr Z

      Reply

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