In Singapore, when the word "retirement" is mentioned, it usually refers to our CPF funds. However, our CPF savings are simply one component of our retirement money, particularly because CPF LIFE monthly dividends begin at 65 years old.
While CPF is a cornerstone of retirement planning in Singapore, it's crucial to understand that it's not the only piece of the puzzle. Many Singaporeans are now exploring additional avenues to secure their financial future, such as private retirement plans, investment portfolios, and even entrepreneurship in their later years. This diversification of retirement strategies reflects a growing awareness of the need for a more comprehensive approach to financial security in one's golden years.
Ideally, we should save for retirement outside of our CPF savings. This can help supplement our retirement income if we eventually decide to stop working. We also have the option of withdrawing funds from it first if we want to retire before the age of 65.
Of course, there will always be retirement "hacks" available to help people optimize their retirement plans. The "4% withdrawal rule" is widely regarded as a fundamental method for developing a successful retirement plan.
The 4% withdrawal rule, developed by William Bengen, a California-based financial planner, focuses on supporting your retirement lifestyle by withdrawing 4% of the value of your investment portfolio in the first year. For example, if you need $2,000 per month or $24,000 per year for retirement, your investment portfolio should be valued at $600,000.
You can withdraw the same amount - equivalent to 4% of your investment portfolio in the first year of retirement - every year for the next 30 years. You should be able to withdraw this amount with little to no risk of running out of money during the next 30 years.
According to simple logic, withdrawing 4% each year for 30 years equals 120% of your initial portfolio worth. This withdrawal strategy was developed with the assumption that retirees will continue to earn an average return from global markets, with a portfolio evenly split between equities and bonds.
William Bengen's 4% rule was based on a 50-year analysis of market returns from 1926 to 1976, including both stocks and bonds.
It's important to note that while the 4% rule has been a popular guideline for decades, it's not without its critics. Some financial experts argue that in today's low-interest-rate environment and with increasing life expectancies, a more conservative withdrawal rate of 3% or even 2.5% might be more appropriate. Others suggest a dynamic withdrawal strategy that adjusts based on market performance and personal circumstances. These evolving perspectives highlight the need for retirees to stay informed and flexible in their financial planning.
Limitations of the 4% Withdrawal Rule—And Why You Should Consider Adjusting
Despite its popularity and simplicity, relying only on the 4% withdrawal guideline for your retirement plan has several significant limits.
One of the most significant negatives is the rigorous limitations that are imposed to an individual's portfolio, both in terms of asset allocation and time horizon that allows for safe withdrawal.
Many people's asset mix (the percentage of equities and bonds in their retirement portfolio) will vary. Obviously, you can rebalance your retirement portfolio before retiring. However, this may be determined by the health of the economy at the time you intend to retire. For example, if there is a market downturn, you may need to considerably reduce your bond allocation in order to balance your stock allocation. This may not be advisable as you approach retirement.
With Singaporeans potentially living longer and healthier lives, your risk appetite may vary over the next three decades. A rigid 50/50 asset allocation between stocks and bonds may not be suitable for everyone.
Furthermore, the 30-year withdrawal time may be extremely close. This horizon was envisioned in the mid-1990s and may need to be expanded as life expectancy increases. While Singaporeans now have an average life expectancy of 83 years, one in every two Singaporeans over the age of 65 will live beyond 85, and one in every three will live beyond 90.
For individuals who want to retire sooner, the 30-year withdrawal period may have already become obsolete.
Longevity should always be seen positively, but poor planning might have negative consequences. The last thing you want is to discover that your retirement income will run out during your lifetime because you will live longer than expected.
Finally, the 4% withdrawal criterion is based on historical market performance. Furthermore, it is based on market returns from 1926 to 1976. Since 1976, new assumptions and data may be required to determine a safe withdrawal rate. One example is the present sustained inflation rate, which has emerged following a decade of near-zero interest rates.
It is difficult to rely on the 4% withdrawal guideline indefinitely for our entire retirement plan.
Regional and psychological differences are not considered with the 4% withdrawal rule.
There is also a difficulty with consistent spending. The 4% guideline presupposes that you would require the same amount each year (adjusted for inflation), but the reality of retirement - or simply living - is that spending can be lumpy.
In some years, you may incur unexpected expenses, such as medical/healthcare charges. You may require substantial house renovations in one year and not again for the next twenty years. You may also plan annual holidays and want to take a larger trip every few years.
As with any rule made in the United States, we must consider the differences that may apply to us in Singapore, or to anyone outside of the United States.
William Bengen's 50/50 portfolio was designed with the US investor in mind, with 50% equity allocated to the S&P 500 Index and 50% fixed income allocated to intermediate-term Treasuries.
Of fact, while the US stock and bond markets are the world's largest, Singapore investors may have a far broader global asset mix and may be slanted toward the Singapore market. This will undoubtedly affect the predicted return profile of such a portfolio.
Many of us, particularly in Singapore, may hold the majority of our assets in our residences. This need a distinct method to fund our retirement demands. We also have an obligatory retirement nest egg in our CPF, which will provide us with a lifelong income while reducing the hazards of longevity.
The unique financial landscape of Singapore presents both challenges and opportunities for retirement planning. The high cost of living, particularly in housing, means that Singaporeans often have a significant portion of their wealth tied up in real estate. This can complicate the application of traditional retirement rules like the 4% withdrawal rate. Additionally, the strong emphasis on family support and filial piety in Singaporean culture may influence retirement strategies, with some individuals factoring in potential financial support from their children or planning to leave a substantial inheritance. These cultural and economic factors underscore the importance of tailoring retirement plans to the specific context of Singapore.
There are other "alternative" techniques to the 4% rule, but one of the most effective is to have various streams of income by the time we retire.
As Singaporeans, we are fortunate to have one such stream in the form of CPF LIFE payouts, as well as the flexibility of several retirement sums that can provide varying levels of monthly payouts once we reach the age of 65.
We might also consider our monthly CPF LIFE payouts to lessen our dependency on a separate retirement fund.
Of course, this can help us be more careful with our withdrawal rate (for example, withdrawing 3% annually rather than 4%) and alleviate some of the concerns about not having enough money in retirement. Naturally, this cushion will either boost or deflate our retirement savings.
Many alternative approaches to prepare beyond it include factoring in everything the 4% rule does not, primarily time horizon, asset allocation mix, and unforeseen expenses. We should try to tailor these selections to our specific scenario.
In recent years, there's been a growing trend among Singaporeans to explore alternative retirement strategies that go beyond traditional savings and investments. Some are turning to passive income streams such as rental properties, dividend-paying stocks, or even starting small businesses that can be managed in retirement. Others are embracing the concept of a "phased retirement," where they gradually reduce their work hours over time rather than stopping abruptly. This approach not only provides a smoother transition into retirement but also allows for continued income and social engagement. As the retirement landscape evolves, it's clear that flexibility, creativity, and ongoing financial education will be key to ensuring a comfortable and fulfilling retirement for Singaporeans.
