You will be able to explain the main reasons a 4% withdrawal may be too high for someone retiring early in Singapore.
Most of what you read about the 4% rule assumes you are the kind of retiree it was designed around. If your situation is different, the rate that is safe for you may be higher or lower than 4%. Before you rely on the number, you need to know which way each difference pushes it.
Lesson 2.1, "Where the 4% rule came from", showed what Bengen and the Trinity study tested. The rule they produced fits someone like a 65-year-old retiring in Ohio, with a US pension and an American share portfolio bought through a low-cost fund. That person has read about the 4% rule, and it was built for someone very close to them.
Now take a 45-year-old in Tampines who plans to stop work. They invest through a platform that charges a yearly fee and buy funds holding shares from around the world. They have read about the same rule. It may still help them, but only after some adjustments, because their situation differs from the Ohio retiree's in four ways.
Your horizon is how long your money must last. The research looked at retirements of thirty years, sometimes less. A thirty-year horizon suits someone who stops work at 65 and plans to age 95. If you stop at 45, your money may need to last forty or fifty years.
Over thirty years, a portfolio can be run down to almost nothing by the end and still count as a success. Over fifty years, the same withdrawals would empty it long before the end. To last longer, a portfolio has to be drawn more gently so that it keeps more of its value along the way.
In Singapore there is a partial offset. CPF LIFE pays an income for life from your payout eligibility age. Your investments still have to carry you alone through the years before CPF LIFE starts, and top it up afterwards. Module 3 builds CPF LIFE income into the plan. A long horizon pushes your rate down.
Both studies used US market history. Over the twentieth century the US grew into the world's largest economy, and its stock market delivered strong returns. A rule built on the most successful market of that period may be too generous for other markets and for the future.
Other markets have had far worse stretches. Japan's stock market peaked at the end of 1989 and took more than three decades to get back to that level. A retiree drawing 4% from Japanese shares from 1990 onwards would have had a very different experience from the one in Bengen's tables.
Nobody knows which market will have the good century next. A global portfolio spreads that bet, which is one reason many investors hold one. "Investing in US and global markets from Singapore" covers how to do this from here. Still, no single market history tells you what the next thirty or forty years will bring. Uncertainty about future returns pushes your rate down, at least until you have a buffer and some flexibility.
The studies mostly ignored the costs real investors pay. These costs reduce your return every year:
the fund's expense ratio platform or advisory fees foreign exchange spreads tax withheld on dividends from some overseas shares
Costs have a bigger effect than they seem to. Say your investments return 5% a year before costs (an example figure) and you pay 1% in total fees. That leaves 4%. The 1% fee is a fifth of your 5% return, and at a 4% withdrawal rate it equals a quarter of everything you withdraw.
Many Singapore investors buy overseas funds or shares. US tax is generally withheld from dividends on US shares paid to foreign investors, so this withholding tax is taken off before the money reaches you. The rate depends on the recipient's country of residence and whether that country has a tax treaty with the US. If you hold US shares through a fund, the fund is the recipient, so where the fund is domiciled, meaning where it is based, matters for that reason. Check the current rate on the US Internal Revenue Service (IRS) website and in the fund's documents, and count it as a cost. High costs push your rate down. Lower costs give you more room.
Bengen's retiree took the same inflation-adjusted amount every year, whether markets had just crashed or soared. Few real people behave that way. Most would cut back after a bad year.
This is the only one of the four reasons that can work in your favour. If a meaningful share of your spending is flexible, you can trim it in bad years, and a portfolio that does not have to pay for your full spending in the worst years is far more likely to last. Several later withdrawal methods build this in by tying each year's spending partly to how the portfolio has done. Lesson 2.3 and lesson 2.4 turn your flexibility into a written rule. You measured how much of your spending is flexible in Lesson 1.2, "Essential and flexible spending", so use that figure here.
Flexibility only helps if you actually use it. Planning to cut and then not cutting is the same as having no flexibility. Genuine flexibility pushes your rate up, and a plan where almost all spending is essential pushes it down.
You met Priya in module 1. She plans to stop work at about 50, so her horizon is long, which pushes her rate down. She invests globally through funds whose fees she has not yet added up, so market uncertainty and costs both push her rate down too. About a third of her spending is flexible, which pushes her rate up. CPF LIFE will cover a large part of her costs from her payout age, which is an offset.
As with Priya, the four reasons can pull in different directions for the same person. She does not need a precise answer yet, only which way each reason pushes her and roughly by how much.
Do the same for yourself. Work through the four reasons one at a time. Compare your horizon with thirty years, allowing for when CPF LIFE starts. Consider which markets you invest in and how uncertain their future returns are. Add up your expense ratios, platform or advisory fees, FX spreads and dividend withholding tax, and compare the total with your expected return. Work out how much of your spending is genuinely flexible, and whether you would really cut it. For each reason, note the direction, up or down, and the rough size of its effect on your withdrawal rate. Be specific about your own horizon, markets, costs and spending, because the activity asks you to judge each one.
Go through the four reasons one by one. For each, write whether it applies to you and whether it pushes your withdrawal rate up or down.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).