Write your withdrawal method, guardrails and refill rules on a single page.
Jasmine (an invented retiree, with made-up figures throughout) lives in Singapore and draws on CPF LIFE and SRS. Her page of rules starts at 65, when she chooses to start her CPF LIFE payouts and her drawdown settles into its long-run pattern. Age 65 is the CPF payout eligibility age, the earliest you can start, but payouts do not begin on their own then. If you have not given CPF Board instructions by age 70, your CPF LIFE payouts start automatically at 70. Check the CPF Board website for the current rules before you choose your start age.
Rules you keep in your head shift with your mood. Rules written on one page, dated and signed, are the ones you'll follow in a bad year. The work has two parts: write your rules on one page, then test them against one real-shaped market fall to see where they bend or break. Allow about thirty minutes, and have two things open before you start: your drawdown map from Lesson 3.4 and your bucket sizes from Lesson 4.2.
Write down the amount your portfolio pays in the first year of the plan and how it changes in each year after. Put it as a sentence you could hand to someone else. A donee, the person acting for you under a Lasting Power of Attorney, may one day have to follow it. Lesson 7.4 covers the Lasting Power of Attorney.
Jasmine's portfolio pays about S$33,700 in the year she is 65. Her sentence says that essential spending rises by inflation each year, and flexible spending also rises by inflation except in a year after the growth bucket has fallen, when it stays flat.
Guardrails are an upper and a lower limit on your withdrawal rate, checked at the annual review. Going above the upper one triggers a cut in flexible spending, and going below the lower one triggers a raise. Your page should give both limits, what happens at each, and how big each move is.
Centre the guardrails on the withdrawal rate your central drawdown map expects for each age, and not on your starting rate. Add a column beside the map listing the expected rate for every age. Jasmine's guardrails sit 20% either side of that rate. At 66 her map expects about 3.2%, which puts her upper guardrail at about 3.8% and her lower guardrail at about 2.6%. This is her corrected rule, and the test further down shows why she changed it.
Each move is 10% of flexible spending. If her actual rate is above the upper guardrail at the January review, Jasmine cuts flexible spending by 10%, and she cuts again the following January if the rate is still above. If her rate is below the lower guardrail, she raises flexible spending by the same step. Essentials are never cut by these rules, so only the flexible part of her spending moves up or down.
Refills move money between three buckets: growth, middle and cash, with cash held in years of spending. Your page needs to say which bucket pays for refills in a good year and which in a bad year.
A good year is one where the growth bucket ended higher than at the previous review. After a good year, Jasmine sells growth to refill cash to two years and the middle bucket to five years. A bad year is one where the growth bucket ended lower. After a bad year she refills cash from the middle bucket and sells no shares.
Next comes your longest stretch on safe money: the most years you'll go without selling growth assets. Jasmine's is four years. If a fall lasts longer than that, she sells growth in small yearly amounts but never lets the middle bucket fall below three years. Then add a review date to the page. Jasmine's is the first week of January.
Pick a real past market fall and borrow its shape. Round the figures and label them as assumptions, because the next fall won't look exactly like any earlier one. Place the fall at a demanding point, such as just as the plan starts, when the portfolio is near its largest, and walk through your rules one year at a time.
Jasmine borrows the shape of 2008 and 2009 for a global share portfolio: a fall of about 40% in one year and a rise of about 25% in the next (rounded assumptions). She puts the fall in the year she turns 65.
At her review at 66, her savings are about S$683,000. A full withdrawal would be about S$35,300, a rate of about 5.2%, above her upper guardrail of 3.8%. She cuts 10% of flexible spending, about S$1,800, which brings the withdrawal to about S$33,400, or 4.9%. Because the growth bucket fell, she sells no shares and refills cash from the middle bucket. Her cash bucket held two years, so that year's spending was never at risk.
For the review at 67, assume the whole portfolio rose 25%, to about S$812,000 (S$683,000 minus S$33,400, times 1.25). 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%. She makes one more small cut and expects her rate to come back inside the band as markets continue.
The test is there to find weaknesses now. Write down every rule that would have broken or made no sense.
Jasmine's first failure was where her guardrails sat. She had first set them around her starting rate of 3.1%. A withdrawal rate is meant to rise as savings are spent down. In her central case, with no crash, it reaches about 3.7% by 71 and 5% by 80, because her SRS runs out at 70 and her healthcare costs grow faster than inflation. Guardrails tied to the starting rate treat that planned rise as a crisis, and they would have cut her spending in her early seventies even on the central map. Her fix was to tie the band to the expected rate for each age.
Her second failure was size. Guardrail rules soften a 2008-style year but can't undo it if markets never fully recover. Trimming 10% of flexible spending saves her under S$2,000 a year, and a fall that permanently takes a quarter of savings needs a bigger lever. She added a new trigger: if her savings are more than 20% below the central map at two reviews in a row, she will rent out her spare room or look for part-time work, then rerun the drawdown map. Module 5 tests how far levers like these go.
Your finished page is dated and signed, and has five parts:
your starting withdrawal and how it grows your guardrails and the size of each move your refill order your longest stretch on safe money your review date
Underneath the five parts, add a short note naming the past fall you tested, each rule that failed, and the change you made.
Write your page now, then pick the past fall you'll test it against.
Write your rules on one page. Then run them through one past market fall and note any rule that would have failed.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).