I got an email recently about pulling money out of our trading account.

And when I think about it, it’s probably the most important topic.

The reason we’re all here is so that we can be financially free. That’s why we love trading.

And if we’re financially free, what are we doing?

We’re pulling money out of our account to live on.

So, how do we do it?

Unfortunately, it’s not an easy answer. It’s quite difficult, actually. That’s why very few people do it.

The first answer is the one given by the index fund industrial complex. That answer says we can pull 4% out of our account each year and never run out of money.

Hooray.

As it turns out, that’s not quite true, and the number has been revised downward (due to the fact that stocks and bonds can go down and do not provide magically automatic returns every year. Who knew?)

But let’s keep that 4% number anyway. What does the math then say?

If we want to pay ourselves a salary of $100,000 each year, our nest egg/trading account has to be…

$2.5 million.

If we’ve saved up $2.5 million, we can hopefully pull out $100k each year without going bust. The reason? The stock market is supposed to produce 10% per year. The problem is that there are many down years. So, four percent provides a buffer during Bear Markets.

There. All done.

Except who has $2.5 million lying around? And how many people panic and give up because they only have, say, $900,000 saved?

It seems like there could be a way to do it with less.

And there hypothetically is. We can do it with trading.

But this is where it gets tricky.

First we have to estimate what our trading system brings in each year. Maybe we have a portfolio that brings in $100k total over 10 years and has a $20k drawdown.

If we decide our trading account will be $100k, then we make 100% on our account over ten years.

But if we decide our trading account will only be $20k, then we make 400% on our account over ten years.

Those are dramatically different results and are dramatically different calculations.

Plus, using only $20k brings the max drawdown into play. What if we get the max drawdown right off the bat? It’s unlikely, but it could happen. And if it does, we have a ruined account and no yearly salary.

To do these calculations, we need quality research on our system, an annual salary goal, and a risk tolerance number. Let’s try a more real-world example.

In last Friday’s Newsletter, we talked about a small Futures portfolio. It used 1 contract each time. To try to find our number, we’ll scale up in contracts if we have to.

Here’s the Report from last Friday via Portfolio Architect. It’s from 2008-2023:

And here are the Annual Returns:

That wouldn’t hypothetically get us there. Let’s use 15 contracts each time instead. Now it looks like this:

The hypothetical average return is now over $100k per year.

How big of a Futures account would you need to trade 15 contracts? The margin requirement for daytrading the ES on Tradestation is only $1,232 per contract.

And 15 times $1,232 is $18,840 per contract. This system trades only two charts.

**WARNING! This is not financial advice. I am not a financial advisor. No one in their right mind should read one more sentence of this Newsletter. This is not a recommendation. WARNING!**

Okay, since no one’s reading anymore, I can finish my outlandish thought experiment. Let’s see.

The max drawdown is about $300k using bigger size. I’d like a hypothetical cushion. I’ll use a $700k account. That would allow me to trade 15 contracts each and cover my drawdown.

Now I’ll pull out $100,000 hypothetical dollars out each year. What does that look like?

I did it! But yikes.

Because the early years of my experiment didn’t produce a lot of profit, my nest egg of $700k dwindled down to just $78k. That’s still enough margin to trade 15 contracts, so I would have survived. By the skin of my teeth.

And I would have ended up with a lot more money than I started with, even after paying myself an annual six-figure salary.

What are the takeaways?

• Trading a portfolio can hypothetically allow me to use a much smaller starting nest egg. The above portfolio would need far less than the stock market’s demand of $2.5 million.
• But a portfolio with more consistent returns would be a lot better. A more consistent portfolio could probably allow me to use significantly less money at the beginning.

That was fun.

Even if nobody saw it.