Safe Withdrawal Rate Experiment – Month 32 – July 2017

<Standard Introduction>

So I’ve been running an experimental portfolio for, blimey, 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

There was a small retreat at the end of June, but not the kind of thing that us passive investors panic about.

Having a quick look at where the fund is at the end of July;

Jult 2017 - prior to withdrawal

Jult 2017 – prior to withdrawal

The headline number is back up to £740k, with all investments creeping up slightly.  Not really too much going on there.  Worth noting that what looks like a small increase in the fund easily covers the monthly withdrawal.

Income

The fund continued to generate a little bit of interest on it’s cash, £32.  And the bond fund paid it’s monthly dividend, £222 in July.  That’s it, for income.

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.

Some quick sums show that the fund is overweight in the LifeStrategy Fund, the European ETF and cash.  So 5 units of the LS Fund are sold, 26 of the European ETF and the remainder taken from cash.  To keep things simple I’ve ignored any transaction or tax costs.

Withdrawals started at £2,033 in 2015 and have grown to £2,144 for 2017 in line with inflation.

Easy as that.

Parallel Universe

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

July 2017 - comaprison to alternative funds

July 2017 – comaprison to alternative funds

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, strange looking back as the bond fund was worth the most, for quite a while.

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.  

If this had actually been me jumping into Financial Independence, I’d be pretty happy with the financial side of things.  Two and a half years and an increase in fund value above inflation.  I’m guessing that 2.5 years would be enough time to decompress and find my on groove, free of work.

Out of interest I chucked the current portfolio through firecalc, with a period of 40 years it showed a failure of 1 sim out of 107 sims and with a period of 30 years (just to allow the calculator to run through more scenarios) it showed zero failures.  As the portfolio has increased in value since I started this, the withdrawal is effectively 3.5%, so we’d expect the portfolio to be fairly robust.

cfiresim it showed a success rate of 99% over 30 years and 96% over 40 years, so pretty similar to the above.

I wonder at what point we are through the initial ‘sequence of returns’ risk phase, and the potfolios course is largely charted towards being succesful?   

Past investigation posts are here, in handy summary page.

Mr Z

6 thoughts on “Safe Withdrawal Rate Experiment – Month 32 – July 2017

  1. JoeCrystal

    I have to say that it is really interesting to see how it is going. While I will never be in the position to have that kind of money, it is still fun to watch how it is going. I am going to be most intrigued how it will go when the inevitable financial crash happen in the future, which I am hoping that you will still be around to see. For Science! Well, Experiment!

    Reply
  2. FIREin' London

    Hi Mr. Z,
    Thanks once again for continuing with this experiment, it is really interesting to watch and follow! I still can’t believe how well the portfolio has done over the last couple of years even taking the money out!
    As for how long into it before you are past the risk of initial “over drawdown” (or some other more catchy name), I would guess at a minimum 5 years, maybe even 10 if it were me doing it for real right now!
    Enjoy the weekend!
    FiL

    Reply
  3. Retirement Investing Today

    Thanks for keeping this up Mr Z.

    What I’m seeing is that in recent months all this “good” performance is simply coming from the devaluation of sterling which is then just going to feed back into inflation making it all not very helpful for someone living off investments and using the principles of the 4% Rule over the long term.

    Let me demonstrate with my own personal wealth. Since the 01 April 17 my wealth in Sterling is up 5.6%. So far so good but then measured in Euro’s that same wealth has gone precisely nowhere (-0.04% to be exact).

    Reply
  4. SurreyBoy

    Great experiment – please keep going with it. Morningstar study on this area was interesting – saying sub 2% SWR for longer retirements with UK investments with a high likelihood of success.

    http://media.morningstar.com/uk%5CMEDIA%5CResearch_paper%5CUK_Safe_Withdrawal_Rates_ForRetirees.pdf

    I think people fixate a bit on the SWR . Im seeing FI as a bell curve – with spending dipping in the 70s as one winds down or has possibly had all the cruises you can want. The problem then is that as so many are living to high ages, who is paying for the care home? Ermmm……..

    Reply
    1. Retirement Investing Today

      Interesting link SurreyBoy. One important point in that analysis is that they seem to have allowed annual expenses of 1.0%. No FIRE’ee worth their salt is going to be paying that.

      Exhibit 13 is the kicker IMHO. My strategy is probably closest to the 60% Equities which for a 40 year retirement and 99% success would require a withdrawal rate of no more than 1.6%. My expenses are currently 0.22% meaning that 1.6% can become 2.38%. My FIRE plan based on previous research has always been a withdrawal rate of 2.5%. It looks like this research reinforces that plan as being reasonably prudent.

      Reply

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