How much is enough?

bowlhead99

Eco_Miser wrote: »

Eco_Miser wrote: »

... assuming your investments return a consistent 4% p.a forever.
Which might not happen.

capital0ne wrote: »

True, but S&P500 index (or tracker) has returned an average 7%+ since 1950

So you only need 15 times your spend if you invest in the S&P500? (and start in 1950)
The period 1968-1982 would have been 'fun' though.

Of course, basic averages tell you nothing - a key point is that you have to be aware of, and budget for, a buffer for 'sequence of returns' risk.

For example, 4% drawdown plus 3% inflation neatly fits into a 7% return. You might think that sitting there age 40 in 1950 and wanting to fund early retirement by spending £400 per year of your £10k pot (plus inflation), you could just coast through to today age 107 and ready to pop your clogs, having retained the capital in real terms to pass to your heirs.

With that plan, you will be fine if the returns from 1950 go +7%, +7%, +7%, +7% and so on for 67 years without a blip. Someone not drawing down from the pot at all would see their £10k turn into £930k nominal, while someone drawing down £400 plus inflation every year would have had no issues doing that and seen the £10k capital be preserved in real terms.

However what if instead of getting +7%, +7%, +7%, +7% and so on for 67 years, you instead get -1%, -1%, -1%, -1% and so on for 66 years and then +17960% in year 67? Mathematically it is still the same 7% annualised return; if you hadn't touched the pot, the £10k starting money would still turn into £930k nominal. But if you were drawing down £400 a year you would not have even made it half way through the time period before being flat broke; because you lived through some excessively lean early periods and don't make it to the good period(s) later.

Nobody is expecting 66 lean periods in a row before one mega-payoff year. But when you talk of '7% average' from equities, you have to be clear that some years it is +50% and other years it is -50% and that is not comparable with a reliable 7% every year, for planning purposes.

If it is -50% one year (which it will be at some point, if you're fully in equities and only allocated to one single market), and then you draw out 4% of your original '100' pot for two or three years running, you are then left with only about 40% of the previous balance, so when it rebounds by doubling the next week (market goes back up from 50 to 100) you only go back up to 80 instead of 100 and it's like you've taken five years' money out of the portfolio in only two and a half years. That sort of volatility can seriously mess up your plans.

Planning for the sequence of returns risk is recognising that +100%, - 50% when you are drawing money out of a portfolio, is very different from -50%, +100%, even though with no drawdown it would leave you in mathematically the same place.

Also, regardless of the above, capital0ne's comment that "S&P index (or tracker) has returned 7%+ since 1950" should also be taken with caution in any case:

- the tracker would not return as much as the actual index (not that trackers existed in the 1950s anyway)

- you would not have known to put all your money in the index that happened to be the best performing one in the western world over that time period; others were worse.

- a dollar return to US investors may be a quite different return when converted back to sterling for UK investors.

Linton

capital0ne wrote: »

Linton Growth: £106078
Linton Wealth preservation: £101419

Out of interest VLS100 - 100000/103016/102655/104727

.......

Not too large a portfolio then :beer:

Cheers

The thread you quoted from has standardised on a £100K portfolio for reporting purposes. It has nothing to do with the actual size.