The initial draw down plan was first thought of last June. As compared to the method of just using the total dividend and interest to cover the annual expenses, drawing down from the portfolio is more complicated.
After executing it the first time last week and sharing it on InvestingNote, there were some confusion on how it works. I also queried myself on what’s next after I executed my plan.
- When will be the next draw down?
- What if by end of the year, my return becomes less than 6%?
With some thinking, I updated my plan. The image below summarises the process flow.
Essentially what I have written remain relevant but I added in new rules. For ease of reference, the followings are the original rules.
My target is to achieve at least an average return of 10% including dividend from my portfolio. Based on current projection, the minimal average return so that I don’t run out of money is 6%. Using the two numbers as markers, this is what I will do:
- Sell the intended amount once portfolio crosses the 10% mark along the year.
- Sell the intended amount in December if portfolio does not cross the 10% but is above 6%.
- Do not sell if portfolio return is less than 6%.
- Sell the intended amount in the subsequent years once it hits compounded return of about 6%. In another word, 12% at 2nd year and 19% at 3rd year.
In a nutshell, I am working on a 3-year cycle and each time a sell occurs, the cycle is reset. Each year of missed performance would make the subsequent year harder to achieve. However, the nature of stock market is volatility and portfolio performance does swing between two ends of the pendulum but average out over a longer period. So I do fancy my chance, especially my current portfolio’s dividend yield is already north of 3%.
The additional rules that I added are what I will do after I executed the plan.
- If by end of the year where portfolio return at least 6%, the cycle is reset.
- Else cycle remains and proceeds to 2nd year target of 12% return from portfolio value at year 0.
Finally, the other confusion caused is the thinking that the withdrawn amount is the portfolio’s gain. It is not as my annual expenses varies due to projected discretionary items over various years. Also, my targeted return of 10% is intended to grow my portfolio and not just maintain its current size.
With that I am clearer of my plan. Thanks all for your inputs and questions.