You will write your withdrawal method, guardrails and refill rules in one page.
Rules that live in your head change with your mood. Rules on one page, dated and signed, are the ones you follow in a bad year. This exercise writes your withdrawal method, guardrails and refill rules on a single page, then tests them against one real-shaped market fall to see where they would have bent or broken.
Allow about thirty minutes. Have your drawdown map from lesson 3.4 and your bucket sizes from lesson 4.2 open. The worked example uses Jasmine's made-up figures.
Write the amount your portfolio will pay in the first year of your plan, and how it changes each year after.
Jasmine's page starts at 65, when CPF LIFE begins and her drawdown settles into its long-run pattern. Her portfolio pays about S$33,700 that year. Each year after, she raises the essential part by inflation, and the flexible part too, except in a year after her growth bucket has fallen, when the flexible part stays flat.
Write it as a sentence you could hand to someone else, because one day you might. A donee acting under your Lasting Power of Attorney, which lesson 7.4 covers, may have to follow it.
Write your upper and lower guardrails and what happens at each.
Here Jasmine made a change after testing, explained in step 5. Her guardrails are set 20% either side of the withdrawal rate her central drawdown map expects for each age, not her rate at 65. At 66 the map expects about 3.2%, so her upper guardrail that year is about 3.8% and her lower about 2.6%. She lists the expected rate for every age in a column beside her map.
Each move is 10% of her flexible spending. A cut happens when her actual rate is above the upper guardrail at the January review, and again the following January if it is still above. A raise happens when her rate is below the lower guardrail. Essentials are never cut by these rules.
Write which bucket pays for refills in good and bad years, and how long you will go without selling growth.
Jasmine's page says: after a year in which her growth bucket ended higher than at the previous review, sell growth to refill cash to two years and the middle bucket to five. After a year in which it ended lower, refill cash from the middle bucket and sell no shares. Go up to four years without selling growth. If a fall lasts longer, sell growth in small yearly amounts and never let the middle bucket fall below three years.
Add a review date. Hers is the first week of January.
Pick a real market fall and borrow its shape. Use rounded figures and label them as assumptions, because the next fall won't look exactly like any past one.
Jasmine used the shape of 2008 and 2009 for a global share portfolio: a fall of about 40% in one year, followed by a rise of about 25% the next. She put the fall in the year she turns 65, when CPF LIFE has just started and her portfolio is near its largest.
Then she walked through her rules a year at a time.
At her review at 66, her savings are about S$683,000. The full withdrawal for the year, about S$35,300, would be a rate of about 5.2%, well above her upper guardrail of 3.8%. She cuts 10% of her flexible spending, about S$1,800, which brings the withdrawal to about S$33,400, or 4.9%. Her growth bucket fell, so she sells no shares and refills cash from the middle bucket. Her cash bucket held two years, so the year's spending was never at risk.
At her review at 67, assume her whole portfolio rose 25%. It would be worth about S$812,000. With two cuts in place, her withdrawal is about S$33,300, a rate of about 4.1%, just above that year's upper guardrail of about 3.9%. One more small cut, then she expects her rate to drop inside the band as markets carry on.
The point of the test is to find weaknesses now. Write down every rule that would have broken or made no sense.
Jasmine found two.
First, her original guardrails were measured against her starting rate of 3.1%. When she checked them against her central map, with no crash at all, they would have started cutting her spending in her early seventies. Her withdrawal rate is meant to rise as she spends her savings down: it reaches about 3.7% by 71 and 5% by 80 in her central case, because SRS runs out at 70 and healthcare grows faster than inflation. A guardrail tied to the starting rate treats that planned rise as a crisis. That is why step 2 now ties the bands to the expected rate for each age.
Second, the test showed her that the rules soften a 2008-style year but can't undo it if markets never fully recover. Trimming 10% of flexible spending saves under S$2,000 a year. A fall that takes a quarter of her savings permanently needs a bigger lever. She added one line: if her savings are more than 20% below her central map at two reviews in a row, she will rent out her spare room or look for part-time work, and rerun the map. Module 5 tests how far that goes.
A finished version is one page, dated, with five parts: the starting withdrawal and how it grows, the guardrails and the size of each move, the refill order, the longest stretch on safe money, and the review date. Underneath, a short note of the past fall you tested and each rule that failed, with the change you made.
Write your page now, then pick the past fall you'll test it against.
Write the one-page rules and test them against one past market fall, noting any rule that would have failed.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).