Many of my friends and clients have asked me: 

Is it possible to distill all the retirement figures into something simple to focus on? 

Is there a golden rule to retirement? 

Most Singaporeans do contribute to CPF and the special account is mandated as a retirement fund. For simplicity’s sake, let’s take the CPF Special Account, which yields a rate of 4% interest. If we take this 4% and apply it to our principal of $1 million, this will provide the average Singaporean $40,000 a year, translating to about $3,300 per month.

Assuming the average income of a Singaporean is $50,000. They spend about 80% which is equivalent to $40,000. This happens to tie in with the above assumption of $1 million. You only spend the interest and preserve your principal. Certainly, there are many flaws with such an assumption: this provision is for a certain lifestyle that is certainly not luxurious, neither is it meeting bare necessities. There are a lot of “what if’s” in life; a medical contingency, a children’s education fund, debts, and coping with inflation, etc.

Every Singaporean’s lifestyle and needs differ, this is just a simple and straightforward way of distilling retirement planning. Let’s say we choose to retire at age 65, and $1 million is such a massive figure, we scale it to down to one third at $330,000 and assume an annual withdrawal of 4%. Your monthly retirement income would be $1,100. We could complement it with your CPF Basic Retirement Scheme of approximately $1,200. Then, the retirement income per month is not too shabby.

William Bengen, then a financial planner in Southern California, said he had several anxious clients with the same question: How much can I spend in retirement without running out of money?

What he and his computer produced, in 1994, became part of the financial vernacular and is still the most widely referenced rule of thumb.

Known as the “4 percent rule”, it states that retirees who withdrew 4 per cent of their initial retirement portfolio balance and then adjusted that dollar amount for inflation each year thereafter, would have created a series of paychecks that lasted for 30 years.

“I always warned people that the 4 percent rule is not a law of nature like Newton’s laws of motion,” said Mr. Bengen, who graduated from the Massachusetts Institute of Technology with a bachelor’s degree in aeronautics and astronautics in 1969.

Critics aside, there will always be a black swan event [a severe or protracted market downturn that can erode the value of a retirement portfolio] in the future and, in truth, most Singaporeans do not spend their monthly income on a linear basis [spending an equal amount every month]. Mr. Bengen’s 4% rule for retirement is a useful ballpark guide for retirement.

Nevertheless, I always advocate that clients and friends look holistically into their financial context and review their plans annually so that they always remain on track for their retirement plans. Some useful tips (not exhaustive) include:

1. All debts are cleared.
2. Having a comprehensive medical coverage and long term care plan.
3. Having a diversified portfolio of Income-producing assets such as bonds, dividends and income from rental.
4. Preferably some assets should keep pace with inflation, such as Indexed Funds or rental income from a room.
5. Planning for your child’s education or marriage; a substantial gifting
6. Evaluating your lifestyle and goals in life

In parting, do sit down with a qualified independent financial adviser and pay for the advice. No one plans to fail.

However, many have failed to plan for their retirement. Isn’t it time for you to take stock?

Non Nobis Solum

- Alvin Low

Alternatively, to find out more, attend our "The Last 7000 Days" webinar.