You will choose a starting withdrawal rate and a written rule for adjusting spending in good and bad years.
Most people who plan for financial independence pick a withdrawal rate the way they pick a password: whatever the last thing they read suggested. A forum says 4%, a podcast says 3.5%, a cautious relative says nothing above 3%. Each of those may be right for the person saying it. This exercise is about choosing one for yourself, with reasons you can write down and check later, plus a rule for what you will do in good and bad years.
You need your spending base from lesson 1.4, your notes on the four reasons from lesson 2.2, and the spending rule you drafted for lesson 2.3. The whole exercise takes about twenty-five minutes.
Go back to the four reasons in lesson 2.2, Four reasons the rule may not fit you. For each one that applies to you, write a line.
A long horizon is the strongest of them. If you plan to stop work in your forties or early fifties, your money has to last well beyond the thirty years the research tested. High costs come next, so add up the yearly fees on your funds and platforms, and note any tax withheld on overseas dividends. A plan where nearly all spending is essential also pushes the rate down, because you have little room to cut in a bad year.
Now the other side. If a good share of your spending is flexible, and you have written a rule to cut it, the risk falls. If CPF LIFE will cover a large part of your spending from your payout age, your investments only carry the full load for part of the plan, which module 3 works through in detail. A cash buffer, which module 6 sizes, also helps, because it lets you avoid selling in the worst years.
Low costs give you room as well. So does any income you expect to keep, such as part-time work or rent, which module 5 covers.
Look at the two lists side by side. If the first is longer and heavier, start lower, perhaps between 3% and 3.5%. If the second carries more weight, something close to 4% is easier to defend. Very few early retirees can justify going higher, because almost all of them face the first reason.
These ranges are not rules from any study. They are a way to turn your lists into a starting choice. The test comes in module 4, where you run the rate through your own model, and again after modules 3 and 7, when CPF LIFE and healthcare are in the picture. Treat the rate you choose today as a draft.
Your adjustment rule says what you will do with spending in good and bad years. It needs three parts.
The first is a definition of a bad year, specific enough that you cannot argue with it later. A fall of a set percentage in your portfolio's value over the last twelve months works. So does a portfolio worth less, after inflation, than when you started.
The second is what you cut and by how much. Skipping that year's inflation increase is the gentlest step. Cutting flexible spending by a fixed share is stronger.
The third is a definition of a good year and what it allows. Many people let themselves take a one-off extra, such as a bigger trip, rather than raising spending permanently, because a permanent rise is hard to undo.
Write the rule now, while markets and your mood are calm. A rule written during a crash is usually a reaction to it.
Priya, from the earlier lessons, has a made-up spending base of S$44,000 a year.
Her downward list: she plans to stop at about 50, so the money may need to last forty years or more; her funds charge fees she has now totalled at a little under 1% a year; and some of her funds hold US shares, which means tax withheld on dividends.
Her upward list: about S$15,500, roughly 35% of her spending, is flexible, and she has already written a spending rule; CPF LIFE should cover a large part of her costs from her payout age; and she plans to hold a cash buffer.
She chooses 3.5%. Her three reasons: a horizon much longer than thirty years, costs close to 1% that she cannot cut quickly, and enough flexible spending to cope with a bad start.
Her number at that rate is S$44,000 divided by 0.035, about S$1,257,000. That sits between the 25 times figure of S$1,100,000 and the 33 times figure of S$1,452,000 from lesson 2.1, Where the 4% rule came from.
Her adjustment rule reads: "A bad year is one in which my portfolio falls 15% or more over twelve months. After a bad year I skip the inflation increase and halve my travel budget until the portfolio is back to its value at the start of that year. A good year is one in which the portfolio is 25% or more above its starting value after inflation. In a good year I may take one extra trip, but I do not raise my regular spending."
Nobody's research produced the 15% and the 25%. Priya picked them herself, and what matters is that they are written down and she can follow them.
Read your rule as if you were in the middle of a bad year. Is it clear what you would cut? Could you live with it for two years in a row? If not, change it now.
When you are happy with it, you have everything the activity needs: a rate, the reasons behind it, and a rule for both kinds of year.
Write your chosen withdrawal rate with three reasons and your adjustment rule for good and bad years.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).