Most Singaporeans intend that their investment portfolio funds their lifestyle post-retirement. This could be a hard balancing act. Should you withdraw a lot of money from your retirement fund, you risk emptying your portfolio before you retire.
However, If you don’t exhaust it you might end up depriving yourself of a good retirement. You may even resort borrowing from moneylenders to sustain your retirement. How then can you ensure that you have sufficient funds in your portfolio? Here’s a look at ways you can figure out ways for making regular withdrawals from your portfolio.
The Three Philosophies
When it comes to the amount you are to withdraw from your retirement fund, you will come across 3 common principles. Many wealth managers and financial advisors will use one of the three. However, some could have methods tailored for your needs.
- Fixed Withdrawal
When this principle is applied, you will choose to make withdrawals of a fixed amount, and at regular intervals. For instance, you could choose to withdraw S$25,000 a year, irrespective of what is going on in the market, and how your funds perform.
Is this option going to work for me? In such a situation, you normally will need the help of a wealth manager, who will sell off your possessions as requested so that he can produce the sum needed.
This plan is attractive since it offers you regular income following your retirement. But, it has some significant drawbacks. These include, when your wealth manager is not as qualified, it might require you to have the important financial knowledge to help you understand which asset to sell and at what point. You doing this might be out of the question, however, it will mean you will have to pay fees to somebody to do this for you.
Another issue would be that you should avoid volatile assets. Why is this so? Since their fluctuations make it hard to always withdraw a foreseeable amount, and this may be hard to build your retirement fund without involving a personal loan. Particularly if you have to fully omit high-risk assets.
Remember to revise your withdrawal amount during market downturns, to prevent the portfolio from running dry.
- Pure Passive Income
In using this option, you will be living off the profits generated using your existing assets. A good example is any property that you have rent out: you get rental income from it, but you are not actually selling the house for money. Other examples of these are managing using dividend gains from stocks, or an interest gained from bonds and bank accounts.
This approach could be the most favoured. Why do people opt for this method? Assets in your retirement fund do not diminish when you only live off their profit, thus there is little possibility that it will “run out” once you retire.
Regrettably, this option may not be open to regular Singaporeans. Possessions that create substantial returns also tend to be expensive, and need lots of capital to acquire.
For the average Singaporean, who has a modest portfolio (and without property for renting out), profits may amount to several hundred dollars each month. But what can you do to increase your yields? You could consider having to save and also invest aggressively – or create ambitious income goals – so that you can use this method.
Also, remember that the amount you can withdraw will likely fluctuate. Interests change, dividend payouts will not always be the same, and rental income keeps changing with the property market.
- Percentage Of Portfolio
The percentage of portfolio method implies that you withdraw a portion of your portfolio, so as to fund your retirement. An example is having to withdraw7%t of your retirement fund every year. Let’s say the portfolio is valued at $100,000 that year, then you will get $7,000 in that whole year (about S$583 a month).
A popular method would be to use the “4 per cent rule”. This rule is derived from a study carried out in 1998 (Retirement savings: Choosing a withdrawal rate that is sustainable, AAII Journal, pg. 16-21). Without digging deep into the study, it is calculated that a 50 % stocks and 50 % bonds portfolio, having a 4% a year withdrawal rate has a 95% likelihood of running for 30 years.
The other issue with this approach is that payouts are random. For instance, if during the downturn the portfolio loses value, then the withdrawal amount will reduce accordingly.
Caution to Younger Investors
It is very important that younger investors (aged below 50) do not make withdrawals off their retirement investments.
If you continually withdraw funds from your portfolio (e.g you use up your insurance benefits rather than reinvesting them), you could lower your returns significantly. You will also be magnifying the negative impacts of market downturns when you keep withdrawing when times are unfavourable.
You should start considering withdrawing regularly as you near retirement, from their 50s or beyond. Also realize that the more money you save at present, the sooner you may start winding down (and not impact your quality of life).
Even when It’s Not Time for Withdrawals Yet, You Should Start Planning Now
It might be a while until it’s time to use your retirement investments. But, you will benefit more by planning an approach even now. Would you rather use the percentage of the portfolio, to guarantee that your money lasts, or don’t you like the thinking of an unsteady retirement income?
It could be that you wish to live off the profits generated from your assets. Of which you will need to start making savings and investing more aggressively. How can I do this? You could set clear goals, like having about S$500,000 in bonds and stocks by the time you turn 55.
For guidance on this, talk to an expert wealth manager regarding the assets that you will need, depending on the retirement option you want.
Most Singaporeans want that their investment portfolio funds their lifestyle post-retirement. This could be a hard balancing act. But it comes down to how much you want to withdraw from the retirement fund. Thus there are 3 common principles used by wealth managers and financial advisors.