You will be able to explain the main reasons a 4% withdrawal may be too high for an early retiree in Singapore.
Imagine two people who both read about the 4% rule. One is 65, retiring in Ohio, with a US pension and an American share portfolio bought through a low-cost fund. The other is 45, living in Tampines, planning to stop work, investing through a platform that charges a yearly fee, and buying funds that hold shares from around the world. The rule was built for something close to the first person. It might still help the second, but only after a few adjustments.
Lesson 2.1, Where the 4% rule came from, showed what Bengen and the Trinity study tested. This lesson goes through four ways your situation can differ from theirs, and which way each one pushes your withdrawal rate.
The research looked at retirements of thirty years, sometimes less. That fits someone who stops at 65 and plans to age 95. Someone who stops at 45 may need the money to last forty or fifty years.
A longer horizon matters more than it sounds. 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 a long time before the end. To last longer, a portfolio has to be drawn more gently, so that it keeps more of its value as it goes.
In Singapore, there is a partial offset. CPF LIFE will pay you an income for life from your payout eligibility age, and module 3 builds that in. Your investments still have to carry you alone through the years before it starts, and top it up after.
Direction: a long horizon pushes your rate down.
Both studies used US market history. Over the twentieth century, the US grew into the largest economy in the world, and its stock market delivered strong returns. A rule built on the record of the most successful market of the period may be too generous for anywhere else, 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 regain 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.
You do not know which market will have the good century next. A global portfolio spreads that bet, which is one reason many investors hold one, but no single history tells you what the next thirty or forty years will bring.
Direction: 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. Fund expense ratios, platform or advisory fees, foreign exchange spreads and taxes withheld on dividends from some overseas shares all reduce your return every year.
The effect is larger than it looks. If your portfolio returns, say, 5% a year before costs in an example, and you pay 1% in total fees, you keep 4%. That 1% is a fifth of your return. At a 4% withdrawal rate, it is the same size as a quarter of everything you take out.
In Singapore, many investors buy overseas funds or shares. Dividends from US shares, for example, usually have tax withheld before they reach you, and the rate depends on the fund's structure and where it is domiciled. Check the current treatment on the fund's documents and the IRAS website, and count it as a cost. Global investing from Singapore is covered in Investing in US and global markets from Singapore.
Direction: high costs push your rate down. Lower costs give you 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.
That makes this the one reason that can work in your favour. If a meaningful share of your spending is flexible, as you measured in lesson 1.2, Essential and flexible spending, you can trim it in bad years. A portfolio that does not have to pay 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.
The catch is that flexibility only helps if you use it. Planning to cut and then not cutting is the same as having no flexibility at all. Lesson 2.3 and lesson 2.4 turn this into a written rule.
Direction: genuine flexibility pushes your rate up. A plan where almost everything is essential pushes it down.
For Priya, from module 1, the four reasons pull in different directions. She plans to stop at about 50, so her horizon is long. Her investments are global, through funds with fees she has not yet totalled. On the other side, about a third of her spending is flexible, and CPF LIFE will cover a large part of her costs from her payout age.
She does not need a precise answer yet. She needs to know which way each reason pushes her, and by roughly how much. Do the same for yourself. Work through the four reasons one at a time, and be specific about your own horizon, markets, costs and spending, because the activity asks you to judge each one.
For each of the four reasons, write whether it applies to you and how it would push your withdrawal rate up or down.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).