Posts by: Dan Montgomery

Investment Growth

An Analysis of the Thornhill Method — Part 1: The Dividend Delusion

Posted by on 5 May 2019 in Investing & Asset Allocation

If you’ve been hanging around financial independence forums, you might have noticed two competing approaches to financial independence.

The first advocates accumulative a large portfolio of shares and sell those shares as income during retirement. And the second — known as the Thornhill Method — advocates accumulating a growing dividend stream and living off dividend income during retirement.

You may have noticed that there is a growing number of people advocating the Thornhill Method. It makes sense. The approach is quite intuitive and easy to understand, and seemingly overcomes challenges with the original approach to financial independence (e.g. sequence of returns risk).

However, there hasn’t really been a serious, objective analysis of the Thornhill Method and its implications for retirement. It’s a big topic, so in this first post we’ll take a deep dive into dividends to compare dividend income and selling shares for retirement income.

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Net Worth Report: Quarter 1, 2019

Posted by on 10 April 2019 in Net Worth Reports

It’s been a long time between drinks! Here’s the first Net Worth Report since we changed from a monthly to a quarterly format.

It was a very successful quarter, with the share market returning well and some unexpected income. And I took the opportunity to refinance my mortgage to a more reasonable rate!

And in the background I’ve been working on something that I think you’ll all like. A new online calculator. The first of it’s kind. I’ll tell you all about it later in the post!

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Emergency Funds Revisted: Real World Simulations

Posted by on 22 March 2019 in Investing & Asset Allocation

In our last post on emergency funds, we looked at emergency funds at a very high level. We found that over the period 2003-2018 an emergency fund in the market returned more than an emergency fund in an offset account. But after tax, the offset account did better.

But a fair criticism of this type of analysis is that it looks at a single cohort. That is, one cohort that invested their funds at the beginning of 2003.

An improved approach would be to simulate how an emergency fund might work in the real world for a bunch of different cohorts. Then we can compare the performance of those cohorts and look for broad trends.

So in the post we take a closer look at emergency funds to understand when they’re better off in the market and when they’re better off in an offset account.

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Emergency funds belong in your offset account (or the stock market)

Posted by on 28 February 2019 in Investing & Asset Allocation

If you follow big name financial independence bloggers, you’ll notice that there’s a growing trend advocating we put our emergency fund in the stock market.

The theory is that an emergency fund is for people who don’t have the foresight to manage their money properly. But we’re financial independence enthusiasts, we know what we’re doing.

Although this is correct for most people, we Australians have a unique product that has both the liquidity of a savings accounts and the return of the stock market. It’s the mortgage offset account.

But where’s the best place for our emergency fund? Does the offset account trump the market? And if we don’t have an offset account, can we feel comfortable putting all our money in the stock market?

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Safe Withdrawal Rates for Aussies — Part 8: Summary (So Far)

Posted by on 11 February 2019 in Safe Withdrawal Rate Series

Many of us in the financial independence community like to consider ourselves non-conformists. While the masses are deep in consumer debt and locking themselves into years of work, the rest of us are being smarter with our money and setting ourselves up for a long life of leisure.

But at the same time, we all praise the 4% Rule like it’s gospel without questioning whether it applies to early retirees, particularly us way over here in Australia.

Over the last few months we’ve been deep in safe withdrawal rate analysis to test whether the 4% Rule actually works for us Aussies — or whether it’s not quite as ‘safe’ as we think.

This article stitches all that analysis together and introduces a simple tool for us to determine the exact safe withdrawal rate that applies to our individual circumstances and risk tolerance.

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Investment Growth

2018 Net Worth Report: Year in Review

Posted by on 5 February 2019 in Net Worth Reports

I think it’s good to take some time every six to twelve months to evaluate the progress of our journey to financial independence. Not only is it motivating to recognise our progress, but we can also identify areas where we are falling short and develop ways to improve.

With that in mind, here is my year in review for 2018. I review my Profit and Loss statement and Balance Sheet for my entire financial independence journey, describe how my money flows between accounts, and share my successes and  failures.

Plus there are a few little announcements at the end!

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Safe Withdrawal Rates for Aussies — Part 7: Sequence of Returns Risk

Posted by on 14 January 2019 in Safe Withdrawal Rate Series

Over the last couple of months we’ve spoken a lot about how varying portfolio factors, such as asset allocation and retirement length, affects safe withdrawal rate. And now we have a clearer view of  how much we can withdraw from our portfolio without running our of money during retirement.

But we haven’t actually spoken about what market conditions determine safe withdrawal rates. Why are some periods associated with low safe withdrawal rates and others not?

So in this article we deep dive into the mathematics behind safe withdrawal rates to figure out what you want to stock market to be doing while you’re saving money and while you’re withdrawing money in retirement.

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Safe Withdrawal Rates for Aussies — Part 6: Final Portfolio Balance

Posted by on 7 January 2019 in Safe Withdrawal Rate Series

After a short Christmas and New Year’s break, we’re back into safe withdrawal rates!

All the work that we have conducted so far has defined a successful retirement portfolio as a portfolio that has does not run out of money during retirement. So we calculated the safe withdrawal rate that would completely deplete the portfolio at the last day of retirement.

But, practically speaking, this would be a scary ride for many retirees. There would be a number of close calls in which the portfolio balance fell very close to zero but did not technically fail. In these cases, it’s not hard to imagine that a retiree would do something drastic, like an undignified return to work in their 70s or 80s.

Should that portfolio be considered safe? It may not have run out of money but it wasn’t a comfortable ride into retirement. A cushion would be nice.

Moreover, I’d guess that many retirees don’t want to end retirement with very little money. Surely most people want to bequest something to their family or favourite charity.

It seems that we could make a fair argument that most people want some balance left in their portfolio at the end of retirement. So in this article we examine the effect of the target final portfolio balance on safe withdrawal rates.

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Safe Withdrawal Rates for Aussies — Part 5: Retirement Length

Posted by on 23 December 2018 in Safe Withdrawal Rate Series

In part 3 of our Safe Withdrawal Rate Series we set out to determine the optimal mix of Australian equities and Australian bonds that would allow us to withdraw the most from our retirement portfolios without running out of money.

We found that we could safely withdraw 4.00% of our retirement balance per year (adjusted for inflation) as long as the portfolios had at least 75% Australian equities.

We also noticed that portfolios with 75% equities and 25% bonds actually performed better than a 100% equities portfolio. This was our first indication that diversification can be beneficial, even if we diversify into a lower return asset.

Then in part 4 of the series, we extended our analysis to determine whether international exposure would be better for Australian retirees. We found that we can safely withdraw more when Aussie retirement portfolios were made up of Australian equities, U.S. equities and U.S. bonds. We don’t even need to buy Australian bonds!

One conscious limitation of all that previous analysis is that we assumed a 30 year retirement length. However, in reality many early retirees may be retired for 40, 50 or even 60 years. So in this article we will examine the effect of longer retirement lengths on safe withdrawal rates.

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Safe Withdrawal Rates for Aussies — Part 4: Portfolio Optimisation (Equities, Bonds, Domestic & International)

Posted by on 12 December 2018 in Safe Withdrawal Rate Series

In Part 3 of our Safe Withdrawal Rate series we determined the best mix of Australian equities and bonds to maximise the chance of a retirement portfolio lasting 30 years. We discovered that a mix of 75% Australian equities and 25% Australian bond was optimal.

But in reality, most of us Aussies invest in a mix of Australian and U.S. markets (and possibly some ‘whole of world’ markets).

So in this article, we are going to extend our previous analysis to look at an internationally diversified portfolio. We are going to determine how we should allocate our retirement portfolio across Australian equities, Australian bonds, U.S. equities and U.S. bonds.

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