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
Example
I have accumulated a $300,000 nest egg. I invest it in a 60% Stocks/40% Bonds Globally Diversified Balanced Portfolio
One year later, I start withdrawing 4% per annum.
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.
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)
