Safe Withdrawal Rate Experiment – Month 31 – June 2017

<Introduction>

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?

<Introduction End>

Initial Position

At the end of the last update, things were looking pretty rosy, with the fund up at the end of May, clawing back some of the retreat that April saw.

There was a couple of tasty dividend payments due in June.

Let’s have a gander at where things are prior to any withdrawals;

June 2017 prior to withdrawal

June 2017 prior to withdrawal

The headline number is down £6k on the prior month, it’s less than a percent only a couple of percent but on numbers this big the impact is eye watering.

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.

Income

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.

Withdrawal

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.

Parallel Universe

I also pulled together some alternative portfolios.  You lucky lucky lot.

June 2017 - Fund comparison

June 2017 – Fund comparison

The red line is 100% cash, destined to be depleted as the withdrawals are larger than the interest earned.  

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.

Mr Z

6 thoughts on “Safe Withdrawal Rate Experiment – Month 31 – June 2017

  1. 52Fire

    This is an awesome experiment. Will be intresting to see what happens during a downturn. Just starting out on my investment journey so will be keeping a close eye on this!

    Reply
  2. FIREin' London

    Hi Mr. Z,

    Thanks for continuing to run the experiment – I still really struggle to believe that 2.5 years on, after taking out a couple of grand per month, that the portfolio is still almost 100k up on where it started! If you hadn’t run this I wouldnt have believed it! I wait with interest to see how any potential crash affects it, but suspect I already know over time it will just come back good!

    Hope work is getting more manageable! 🙂
    FiL

    Reply
  3. weenie

    I’ve seen on other websites that they caution against the 4% SWR as they argue that it may work in the US but not in the UK. Your experiment seems to be smashing that kind of thinking but as FiL says, it will be interesting to see what happens when there’s a correction/crash. £100k up after over 2 years though – what a great advert for the Vanguard funds! 🙂

    Reply
  4. Colin

    Fascinating experiment! Like many other posters, the most interesting test will be in a bear market rather than than a long running bull market, although I suspect that you have already baked in some resilience from the initial good run……just shows the importance of timing of the retirement decision ultimately.

    Reply

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