Have you heard of the 4% Rule? It’s a widely quoted guideline often used to determine if one has sufficient money to fund their retirement.
For instance, if you project to spend S$60,000 a year, then using a safe withdrawal rate (SWR) of 4% means you need a liquid asset of S$1.5 million (60,000/0.04 or 60,000×25). You can then withdraw S$60,000 (inflation adjusted) every year, without running out of money for the next 30 years.
It’s a nice rule of thumb, but three years ago when I was thinking about giving up my regular pay, I wasn’t convinced that I can simply apply the rule to make a clear-cut decision.
This image highlights why the 4% Rule didn’t quite fit my scenario.
Here’s a closer look.
The data is not relevant to me
The 4% Rule is based on Trinity Study, done in 1998. Yes, that’s almost 30 years ago and the data used by the study is even older than that.
Additionally, the rule’s findings are typically based on a balanced portfolio of 60% US equities and 40% US bonds, with returns derived from broad-based indexes.
Hence, unless you are investing in similar instruments and allocation, it would be incorrect to think that your portfolio will achieve the same outcome.
This is definitely not the make-up of my portfolio.
While I invest about 50% of my net worth in equities, only 30% of it is in the US stocks, with the remaining 70% in SG stocks.
Moreover, the other half of my net worth are not in US bonds, but in High-Yield Savings Accounts (HYSA), Central Provident Fund (CPF) and Singapore Savings Bonds (SSB).
Therefore, I can’t assume I will get similar return, whether higher or lower, than what is used in the study.
My expenses will not remain the same
The other reason that I found it unrealistic is assuming that expenses will remain the same throughout the retirement years.
The current amount of expenses will probably remain at the same level for the next decade.
However, I am expecting a significant decrease in spending after that, due to the independence of my children, the cessation of car ownership, the completion of payments on certain insurance policies, and a reduction in overseas vacations.
Therefore, simply adjusting current expenses for inflation when projecting future needs can lead to an overestimation.
Talking about inflation, while it’s true that things do get more expensive, it’s also over-simplistic to apply a single number to the overall expenses.
Just like I have shared in my recent post, my expenses for the first half of this year have remained relatively stable, as compared to the previous year. There are some increase in spendings for certain categories, but these are mitigated by a drop in others.
Shared in another post, the new electric tariffs that I will be paying from September are a good 5% lower, as compared to my current contract.
It is thus important to include such details in the projection, else we are likely to end up overestimate the required amount.
My reluctance to withdraw in downturns
The final misalignment between SWR and my view is to draw down from the portfolio regardless of market conditions.
The Math says it doesn’t matter, and I agreed. But being humans, our emotions will make it tough for us to execute the plan.
Furthermore, having trained my mind over past decades to take advantage of market downturns to invest more in quality companies, make it even more difficult for me.
What did I do instead?
It’s clear that I could not simply plug a few numbers and use the SWR to make such an important decision. I needed more granularity in my projection for a clearer picture.
A spreadsheet was set up and data was entered on an annual basis, to account for the various investment returns, the variation in expenses, and withdrawal methodology.
Let me briefly share a bit more on investment returns and withdrawal method.
Expected investment returns
Return from fixed income instruments such as CPF and SSB are easy to compute.
Policy change, like the recent closure of CPF Special Account for individuals aged 55 and over, is rare. Hence, it’s pretty safe to assume that the interest from CPF-OA is likely to remain at 2.5%.
The bigger variable comes from the equities return.
Prior to rebooting my portfolio in 2020, I had consistently been able to obtain more than 10% average return over a 10-year period.
And in spite of a relatively more conservative approach for my new portfolio, I am grateful that I continue to achieve a 10% average return over the past five years.
Hence, if I can keep up with this performance, then I can boast on my death bed that most of my wealth came after I stopped working regularly.
Obviously there’s no guarantee I can continue to achieve that.
While it’s not difficult to get a strong return on a particular year or over a few years, to consistently get a double-digit return over the long-term is not that straightforward.
For example, even for SPDR S&P 500 ETF Trust (NYSE: SPY), its average annualised return over the past 20 to 30 years, ranges only from 8 – 11%.
The good news though is an average return of 5 to 6% will be sufficient to support my expected expenses till when I am 90-year old.
Withdrawal method
To ensure that I do not draw down on my equities during market downturns, I am currently keeping a three-year buffer of annual expenses in cash and equivalents.
For now, my way to maintain this cash buffer is to draw down from my investment portfolio when it managed to make an annual return (including dividends) of at least 6%.
Once I have access to my CPF-OA four years later, I will increase the buffer to five years. It will then be a mix of withdrawing from equities and CPF-OA, depending on market conditions.
What this meant is I am also not going to follow another popular rule of thumb, “100 minus age” rule, to determine the percentage of portfolio to be in stocks, and the remaining in safer assets.
While this rule is commonsensical and advocates de-risking as we aged, it does not account for individual experience in investment.
To me, buffering market downturns with years of expenses is a lot more intuitive.
Safety net
Needing only 5-6% return when I had been getting 10% return already provides some buffer in my plan.
However, as the saying goes, “The biggest risk is the risk that is unseen.”
If the worst-case scenario unfolds, what’s my safety net?
Firstly, CPF Life, a unique annuity plan in Singapore, will provide a certain amount of cash flow after 65, which is sufficient for a basic lifestyle.
Another option is to monetise the house we are staying in. If necessary, we could either move to a smaller house, or utilise the lease buyback scheme, to free up more cash.
It’s worth the effort
Ultimately, the 4% Rule is just a convenient starting point.
It’s worth the effort and time though to devise a strategy that reflects your individual financial realities, evolving expenses, and personal comfort with risk.
This will provide you with added confidence of the desired eventual outcome.
Explore Further on My Approach and Results
Did My Spending Go Up? A Look at My 1H 2025 Expenses
Keppel Electric Renewal: 2 Years of Cheaper Rates!
5-Year Portfolio: Exceeded 10% Annual Return
CPF Special Account Closure: What to Do with Excess OA Savings?
Updated Draw Down Plan
Can I Ditch My Regular Pay?
Pressing the Reset Button
Discover more from The Fat Investor
Subscribe to get the latest posts sent to your email.