4% Retirement Withdrawal Rule

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Retirement

4% Retirement Withdrawal Rule

What is it?

For passive income, withdraw 4% from a Balanced Portfolio (60% equities/40% bonds) in first year

Withdraw “4% + previous year’s inflation” in each subsequent year

Expectation is for the portfolio to last 30 years

Why should we do this?

A simple decumulation strategy that requires a small lump sum to fund retirement, compared to putting it all into fixed deposits

We still have some ability to invest at the start of retirement and make use of the power of markets, as there is time between retirement age and the end of life (based on standard retirement and average life expectancy)

Complements CPF LIFE, providing additional income with flexibility

How do we do it?

Invest in a globally diversified, low-cost Balanced Portfolio at the start of your retirement

Make withdrawals each year at the recommended rate

If able to keep spending lower, withdraw less, especially in years when the markets are down, to preserve portfolio value

Attention!
- CPF LIFE should be the Safe Retirement Income Floor – use CPF LIFE to provide all of your most essential income
- It is not a guarantee that your assets will outlast 30 years as there is sequence-of-returns risk
- You need to have the risk appetite for the Balanced Portfolio
- Read our MoneyOwl Retirement Philosophy to understand other options under our “CPFA” Framework
(Certainty, Probability, Flexibility, Accessibility)

Example

I have accumulated a $300,000 nest egg. I invest it in a 60% Stocks and 40% Bonds balanced portfolio
- One year later, I start withdrawing 4% per annum on a monthly basis
  4% * $300,000 divide by 12 = $1,000 per month
- The inflation for that first year was 2%.

In the second year, I withdraw $1,000 * 1.02 = $1,020 per month
- The inflation for the second year was 1.5%.
- But markets were down a lot, causing my portfolio value to be lower.

In the third year, by the rule, I may withdraw $1,020 *1.015 = $1,035.30 per month.
- But to better preserve my portfolio, I choose to withdraw $1,000 per month instead.