So I’ve been running an experimental portfolio for, blimey, nearly two and a half years now. The idea was to start with a fund of £625k and then withdraw 4% annually, in monthly instalments, just to see what happens. The would give someone £25,000 a year to live off.
Historic investigations concluded that a 4% withdrawal rate gives a reasonable chance of success, and indeed many times the fund continues to grow despite withdrawals. Do a bit of light reading and you’ll find there’s plenty of reasons why a 4% withdrawal rate might be adequate and plenty of reasons why it not be prudent enough. Everybody loves a bit of independent speculation.
I’m looking at just a single example, starting at one point in time, and following a pre-determined set of rules. That’s it, it’s very limited. But, hopefully, a little more engaging as it unfolds in real time.
The markets have been kind and this experimental portfolio has grown more than my real one over the last two and a bit years. The rules I’ve set up are very mechanical; withdraw the same amount at the end of each month regardless of what’s happened. But would you have done anything different, given how it’s unfolded so far?
A quick glance over the numbers shows no one to blame, they are all at it, decreasing in value.
The eagle eyed amongst you will have noticed the big increase in the cash position. This is dividends rolling in.
The fund continued to generate a little bit of interest on it’s cash, £30. And the bond fund paid it’s monthly dividend, £177 in June. But it is the annual distribution from the LifeStrategy fund of £4,077 that’s really boosted the cash.
Withdrawals are made monthly, and taken to balance back towards the initial asset allocation. Which is broadly a 75/20/5 split, of equity/bonds/cash. So if the fund is overweight in bonds at the end of the month, then some of these are sold to get back towards the intended 20% bond holding.
With such a large amount sat in cash following the dividends this month, the withdrawal was completely taken from cash.
Withdrawals started at £2,033 in 2015 and have grown to £2,144 for 2017 in line with inflation.
With all that taken care of it leaves the fund with a total of £735k. Down on the prior month, but still over £100k up on where we started.
I also pulled together some alternative portfolios. You lucky lucky lot.
The green line is 100% in government bonds, a bit hard to see in the graph above but it is a less volatile option than equity
The purple line is 100% in the Vanguard LifeStrategy 100% Equity, the blue our experiment portfolio and the light blue 75% in the Vanguard All World High Yield ETF. They represent the portfolios with a heavier weighting in equity.
They’ve all decreased in June. But let’s be honest, 2 and a half years in and none of the options are a particular cause for concern (sure cash is below where it started…but what else is it going to do!).
Past investigation posts are here, in handy summary page.