Well hello there dear reader. Time has sure been flying by recently, so much that I am only just sneaking this in before the end of the month!
The standard recap
We are now 20 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. Being “Financially Independent” and living off investments, then.
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 would 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 is 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. Suspiciously, that also 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 31/08/2016
Let us start by looking at where the portfolio would be without any withdrawals, just market movements and income from the start of July to the end of August;
Another month, another increase in market value, it would seem. Mr Market has been kind this month and added another £12k to the portfolio.
Take a step back. Although this is a completely fictitious experiment, there are people out there doing this. It’s nearly two years on, and despite withdrawing just over £2k a month the fund has still grown by nearly £70k. Amazing.
A spookily quiet month on the income front;
- £158 income from the U.K. Government Bond UCITS ETF; and
- £42 in interest on a Cash ISA.
A total of £200 for August. Which just isn’t going to cut it, looks like we need to sell down some units.
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.
The US economy is providing the bulk of the growth at the moment, and so it is largely them that will be sold to fund Mr Z’s income habit.
5 units of the LifeStrategy total £757 and 38 units of the S&P500 ETF total £1,196, which combined with a single unit from the UK Gov’t bond Fund and the £200 of income for the month (and a little bit of rounding) leave us with the desired £2,106 withdrawal.
Following the cash withdrawal of £2,106 the portfolio totals £693k, lovely stuff.
Let’s have a look at the historic values of the portfolio, and include the same portfolio but with no withdrawals for comparison, to see how the journey has been so far;
And so cash continues its steady, guaranteed decline. Masquerading as the ultimate safe option, wallowing in it’s liquidity and try to hide the fact that it is on a one way path to being depleted.
The other options still seem to be fairly well correlated, which is a surprise given one of the options is 100% in a government bond fund.
Each month that goes by provides me with yet more confidence that this really will work. Remember, in this experiment there is no earning an income on the side or cutting back spending if desired. If this had been real, we’d be coming towards a year and three quarters of living off the portfolio. That’s plenty of time to have turned something interesting into a small business. Even if that earns £100 a week, that’s a huge strain off the portfolio, further increasing it’s chances of success. Remember, all the 4% Rule tries to do is pull together thousands of possibilities into one number. One withdrawal rate, that aims for a high probability of success for a given mix of equity and bonds without requiring a ridiculous amount of capital to succeed.
A summary of all the past months of the safe withdrawal rate experiment are here.
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