I crafted my first spreadsheet to help you simulate how your portfolio looks like if you consistently sell units to provide inflation adjusted income last week.
I crafted a second spreadsheet.
You can make a copy by clicking on this link.
If you understand the first spreadsheet you can go ahead and have fun with this one.
For those who are new, you might want to read my previous post and also some of my explanation in this post.
Why Should You be Interested in This Spreadsheet?
This spreadsheet might help you answer some lingering doubts.
- If you wonder how a fund/portfolio will look like if you keep selling units to get income.
- If you always think that if you sell units, your fund will go to shit very soon.
- Want to see if Kyith is right that you can get income, but the portfolio can grow even more.
- Want to test and see if start spending $80,000 inflation-adjusted income out of a $1 million portfolio will kill the portfolio.
- Understand important portfolio income concepts.
The Fund We Are Simulating – iShares Core S&P Small-Cap ETF
I am still using a small cap ETF but this time I am using a US-listed ETF.
The iShares Core S&P Small-Cap ETF seeks to track and replicate the performance of the S&P SmallCap 600 Index.
The main reason is that the fund is incepted in 22 May 2000.
This means that we have about 24.6 years of actual performance to have fun with.
Now, there are limitations. US-listed ETFs usually have a dividend distribution (currently 2.2%) but to make it easier to create the spreadsheet, I only include the NAV. This means that the return of this ETF is blunted.
Here are some information of the fund:
There are about 296 months or 24.6 years. The annualized compounded growth is 8.09% without the income distribution. You could imagine the return would be 10% p.a. for almost 25 years if I did not blunt the returns.
This works to your advantage to see whether you will run out of money if the returns is a “weaker” 8% p.a.
The inflation during this period is 2.5% p.a.
There are Enough Negative Events That You Want to Test Potential Negative Sequence of Return Risk.
You might think that if the returns over this period is 8-10% p.a. there aren’t any distressful events. Those of us that are more sober can tell you there were events that comes with higher volatility
There is a major distress for every year.
Spending an Initial $3,000 in Monthly Inflation-Adjusted Income over 24.6 years.
If we start in 2000, we can see that after spending $728,409 in total over 24 years, the portfolio was still alive and end with $3.3 million. Income grew from $3,000 monthly to $5,559 monthly after 24 years.
The portfolio ended with a current withdrawal rate of 2% instead of 3.6%.
Despite the number of units getting cut by half, the NAV per unit climbed from $17 to $115.
Retiring Just Before Great Financial Crisis
With such a range of data, this might help answer your question if you end up retiring a few months before the Great Financial Crisis:
If we spend an initial of $3,000 from $1 million, you will still have $1.7 mil despite the distress. You would see your income grow and also your capital.
Your $1 million fund gets cut to less than 50% but still end up with 70% more capital despite having an inflation-adjusted income.
How Much Do You Have to Spend to Kill The Portfolio?
Start with a spending of $6,000 a month.
The same fund, if you start slightly before GFC, you will be left with $2,000.
The same portfolio, same time period, but instead of portfolio value ending with $1.7 mil, you end up running out of money.
Same 8.09% p.a. return.
Stare at the invested fund value over time for this chart versus the previous one.
Both gets cut to below $500,000.
But how come one fund can still recover while the other one just went into a downward spiral.
Returns? I already said no.
It is how much income you spend relative to your starting portfolio value or your Safe Withdrawal Rate.
If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.
You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
You can read more about Kyith here.
