Safe Withdrawal Rate Experiment – Month 22 – October 2016

Well, it’s been raining for about a billion hours straight in the UK, so it’s about time to start writing up my sweet SWR experiment.  

The standard recap

We are now 22 months into this 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 20ft swell of downward volatility or will there be any splurging on new biros and fancy tea bags when the financial sun is beaming.  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 31/10/2016

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

 

The Finance Zombie - Withdrawal Rate Experiment

October 2016 – Withdrawal Rate Experiment

And so the fund just seems to keep on increasing, that’s another £12k gained this month, including both income and capital gains.

Income;

It’s worth splitting out the income, we’re all about clarity around here.  It’s pretty dry on the income front, this month;

  • £154 income from the U.K. Government Bond UCITS ETF; and
  • £42 in interest on a Cash ISA.

A total of £196 for October, pretty small compared to the cacophony of income in September.  

Withdrawal Time

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.

Some basic wizadry in Excel tells me that Mr Z needs to sell 6 units of the LifeStrategy fund, for £991, and 28 units of the S&P500 ETF for £929.  Which, when combined with £187 of cash, gives us a lovely base curry sauce..,no, it gives us the total £2,106 withdrawal for the month.

After taking out those units and passing the proceeds of £2,106 to Mr Z we are left with £704k in the fund.

A quick graph will help to show the progression of the fund over the last couple of years;

The Finance Zombie - Withdrawal Experiment

October withdrawal experiment progression

Since about June the fund has launched upwards, despite Brexit and deespite Trump being elected which only added more uncertainty into the market.  Values are being boosted by currency movements, so it’s a little unclear where we actually are at the moment.  If it were me, I’d be pretty happy about where I was.  After nearly two years of living off my investments being in a better position than where I started is pretty awesome.    

Some comparisons

 Let’s have a quick gander at where we would be with some alternate fund choices;
The Finance Zombie - Withdrawal Experiment

The battle of the alternate fund choices

Things are changing, the government bond options falls again whilst the options with at least some equity climb once again.  The government bond option was flying and now sits £75k below the front runner, which is all in the Vanguard LifeStrategy 100% fund.    

At this point, cash is clearly the worst option.  There’s still £597k in cash, but that’s £134k less than the best performing option.  Admittedly there’s no volatility to deal with (OK, strictly the underlying interest rate has volatility) but the premium you’re paying for the smaller volatility is looking pretty expensive.  It also demonstrates the pain you can receive by sitting on cash, everyone and their pug were saying markets were overvalued in 2014, yet sitting on cash has worked out the worst option.

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

Mr Z

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9 thoughts on “Safe Withdrawal Rate Experiment – Month 22 – October 2016

  1. theFIREstarter

    Very interesting to see the 100% LS fund winning out at the moment!

    I have a feeling that unless you had one of the worst sample points to start withdrawing that would be the winner 9/10 times.

    Cheers as always for keeping this up to date!

    Reply
  2. weenie

    If VHYL (High Yield) continues with its current trajectory, it will end up overtaking your experimental portfolio, although it’s very interesting that the VLS100% continues to go from strength to strength. Wonder how things will look when there is a big market correction, eg when Brexit actually happens or when Trump’s policies get put into place.

    Keep up these great updates!

    Reply
    1. Mr Zombie Post author

      Two surprises from earlier were VHYL lagging behind and the gov’t bonds soaring high. Things are back to “normal”, if that’s such a thing…!

      Mr Z

      Reply
  3. sarah

    Great detail, I’m new to this financial planning, but I wanted to ask you (in your imaginary galaxy) would you need £25,000 to live on? If your house is paid off and we have the NHS and you have a car paid off, and you have no children, or if you do have a partner and children, how would the £2000 a month be spent? (Sorry if you’ve done this question already on your blog).

    Reply
    1. Mr Zombie Post author

      Hi Sarah – welcome 🙂

      Time to go back…

      When I very first started “extreme” saving I plucked a target of £1million out of thin air, largely because it sounds impressive. Did some sums, thought I might be able to make it by the time I’m 50 and then knuckled down.

      Not long after I actually thought about it and came to the conclusion that £40k a year was a feckload more money than I would actually spend, so revised it down to £25k a year, and so £625k in funds became the new target. Which is where the numbers for this experiment came from.

      In truth, I haven’t properly looked at this for a little while (in part because my last year or so of spending include sporadic wedding costs and so out goings look high compared to normal!). Some quick sums suggest something around £1,100 –> £1,200 would cover both of us, including some ‘fun’ money and holiday money as well, so close to the £350k mark in savings would cover us the basics for us both with the house paid off. Which looks loads at first glance, but can be built up surprisingly quick with some good habits on the go 😀 And that includes a little bit of prudence and some wiggle room (the fun / holiday money can always be reduced…)

      In terms of the experiment, in doesn’t really matter as you’d alter the starting assets and the withdrawal and be in the same place. (In reality there would be fees and taxes to deal with…but we don’t want to over complicate things!)

      Mr Z

      Reply
  4. FIREin' London

    Hi Mr. Z,

    Once again a huge thank you for running the experiment! If you had asked me when you started this, I wouldnt have said it was possible that you would be up on your original position whilst withdrawing your money!

    As a holder of the Vanguard High Yield I am pleased to see it slowly ticking up, but I suspect over the years there will be little difference between the selection, other than ones that are pure cash / bonds, but I wait to see.

    Really enjoying it, so please keep the experiment going!

    FIREin’ London

    Reply
    1. Mr Zombie Post author

      Hi FiL,

      No worries – enjoy it 🙂

      I tend to agree, anything with global diversified equity should be fairly close…but at the moment things sure are looking rosy!

      Mr Z

      Reply

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