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