Financial review at 30 June 2019

Half Year Summary

A total return in the year to date of 11.70%, slightly behind the index, results after draw-down expenditure in a capital uplift of 9.65%.

Source: Pixabay

Introduction

I review my/our financial situation at the end of each month so as to track where we are, and also because I find it interesting. I’d now like to write up a review for this month end and half year end, after 5 ½ years of drawdown.

As I am not earning any income from employment any more, I am in draw-down in that I am drawing down some of my financial assets each month to cover our spending. I have been in draw-down for 5 ½ years now so that will be the main time period under review. My key performance indicators in this review are capital, income, expenditure, total return, and income growth. My key comparisons are with an inflation index, an equity index, and the “safe withdrawal rate” (S.W.R.).

Inflation (R.P.I.)

My chosen inflation index is the retail price index. I have chosen this one because it has the longest history, it is perhaps more inclusive than other rival indices, it tends to be higher than these rivals, and is favoured less by politicians.  In 5 ½ years the RPI index has increased by 14.44% (I have estimated the figure for June).

Equities (FTSE UK All Share)

My chosen equity index is the FTSE All Share total return index. I have chosen this one because I live in the UK and the majority of my portfolio is invested in UK equities. This index also has a history that extends back to when I started investing in 1986. In 5 ½ years the FTSE UK All Share total return index has increased by 37.97%. If I chose to invest in funds that attempt to passively replicate and track the index these would return less than the index because of fees and tracking errors. A typical unit trust tracker (M&G Index Tracker Fund Sterling A Acc) had a total return of 34.26%.

“Safe Withdrawal Rate” (SWR)

This approach suggests taking an income, or drawing down, only 4% of your available capital in year one and then increasing that amount by inflation each year.

Capital

In 5 ½ years my capital has increased by 16.10%. This is above the increase in RPI inflation at this point. If I give my drawdown portfolio capital an index value of 100 at 31 December 2013 then at 30 June 2019 it is now at 116.10. The year by year movement is shown in this table and graph:

Year endCapitalGrowthRPIGrowth
2013100.00100.00
2014100.180.18101.621.62
201596.05-4.13102.841.20
2016106.8711.27105.412.49
2017117.309.77109.754.12
2018105.88-9.74112.712.70
2019HY116.109.65114.441.54
as % of 2013 assets

Income

In 5 ½ years my income has increased from 3.53% to 5.18% of my original capital. This is now above the income level according to the “safe withdrawal rate” which has increased from 4.00% to 4.51%. The year by year movement is shown in this table and graph:

Year end4% RuleIncome
20133.43
20144.003.53
20154.063.81
20164.113.92
20174.224.63
20184.394.89
2019HY*4.515.18
as % of 2013 assets

* I have estimated the annual income for the full 2019 year.

Expenditure

In 5 ½ years my expenditure has increased by 29.93%. This is above the level of RPI inflation, but below the increase in my income. My spending as a percentage of my income has fallen to 79.34%. Expenditure is running at an annual rate of 3.70% of the average asset value during the 2019 year, which is similar to recent years. The year by year movement is shown in this table and graph:

Year endIncomeExpenditureGrowthRPISpend %Expenditure
2013108.40100.00100.0092.25-3.52
2014111.5892.27-7.73101.6282.69-2.91
2015120.61104.7913.58102.8486.88-3.38
2016124.12122.1616.58105.4198.42-3.81
2017146.58123.340.97109.7584.14-3.48
2018154.75126.192.31112.7181.54-3.57
2019HY*163.76129.932.96114.4479.34-3.70
as % of 2013 expenditureas % of year average assets

* I have estimated the annual income and expenditure for the full 2019 year.

Total return

The portfolio total return has been 40.43% over this 5 ½ year period. It is pleasing to exceed the FTSE All Share total return index and a typical index tracker fund (M&G Index Tracker Fund Sterling A Acc).

The year by year movement is shown in this table and graph:

Year endTotal ReturnGrowthIndexGrowthTrackerGrowth
2013100.00100.00100.00
2014103.143.14101.181.1899.69-0.31
2015102.28-0.83102.170.98101.291.61
2016118.2415.60119.2916.75116.5415.05
2017134.3913.66134.9113.10131.4612.80
2018125.72-6.45122.13-9.47119.69-8.95
2019HY140.4311.70137.9712.97134.2612.17

Income growth

My current main objective is income growth rather than total return and here I am pleased to record that income has grown by 51.06% over 5 ½ years. The portfolio income yield has increased from an annual rate of 3.82% in 2013 to 4.66% in 2019. This is calculated on the average asset value during the year. The year by year movement is shown in this table and graph:

Year endIncomeGrowthRPIGrowthIncome Yield
2013100.00100.003.82
2014102.932.93101.621.623.52
2015111.268.10102.841.203.89
2016114.502.91105.412.493.87
2017135.2218.10109.754.124.13
2018142.755.57112.712.704.38
2019HY*151.065.82114.441.544.66
as % of 2013 incomeas % of year average assets

* I have estimated the annual income for the full 2019 year.

The income growth has resulted from increases in the dividends paid per share, from re-investing any unspent income, and from re-positioning the portfolio towards higher yielding investments. 33% of the portfolio is now in higher yielding investments compared to 9% at the outset. These investments pay out between 5% and 7.5% currently. I am hopeful that this allocation will not unduly impact on overall future capital and income growth. We will see.

Spending is currently around 80% of portfolio income so there is a good margin of safety for any exceptional spends that may arise (or any dividend reductions), but in the mean-time I will re-invest for more income. At some point if portfolio income runs further ahead of spending then I can choose to spend more (discretionary choices) or else review the income growth objective and the high yield allocation.

8 Replies to “Financial review at 30 June 2019”

  1. Another great post. Real world experience almost always provides the most interesting content, and, clearly, so far, so good.
    Assuming I have understood your post correctly, you are re-investing all of your unspent income.
    If I may, how does your strategy cope with any future significant and prolonged, albeit temporary, drop in the value of your capital?

  2. Thanks for your comment. I am re-investing unspent income and I am fully invested. When there is a drop in capital values then I will try to keep calm and carry on. I will aim to stay invested and ride out any storm. The investment trusts I hold should be able to maintain or even increase their dividends and thereby enable me to continue to draw-down.

  3. Thanks for the info.
    Just a thought, but are you aware of the work by Karsten (aka Big ERN) at Early Retirement Now. In any case, his large body of work includes extensive examination of the so-called safe withdrawal rate. You may find Part 25 interesting, see https://earlyretirementnow.com/2018/05/23/the-ultimate-guide-to-safe-withdrawal-rates-part-25-more-flexibility-myths/
    In particular I would point you at the Section called “Cash Bucket”.
    The UK equivalent to Karsten’s 2.75 is around 4 according to a number of sources, see e.g. 7 Circles, and the discussion in the comments section at https://the7circles.uk/safe-withdrawal-rates-ern-7/

  4. Thanks for your comment and the suggested reading. I have not read these before but have read other writers on the so-called “4% safe withdrawal rate”. These are interesting studies but there can be no definitive answer because the future is unknown. We can only interpret the past as our guide to a possible future, and 4% (or any other %) can only be a guideline, in my view.

    I think a cash bucket could provide useful comfort for some people during a downturn, but I prefer having a natural yield (4.66%) higher than my expenditure (3.70%). I also believe I could reduce my expenditure if I had to, but not to Mike Rawson’s 1%!

  5. Indeed, “the future is unknown and unknowable” is the phrase I like.

    Re the 1%, yeah tricky – but I imagine you may probably benefit from some form of pension(s) in the not too distant future that might help out a bit?

    Apart from psychological benefits, a cash bucket might also improve liquidity.

  6. I would like to think so too.
    However, my experience of 2016 state pension changes can be summarised as pay more for less benefits!

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