Retirement Funding Optimization

[NYY1]

Also, some may find the example above intuitively difficult to reconcile. 20% tax saved today less 10% tax paid in the future (20%/2) equal 10% better off. 1.255% or 1.01255^10 = 13.3%, so how can one still be indifferent?

The answer is that the lower rate (R - add'l expenses or 5.945% above) compounds on a higher base (1 - 20%/2 = 0.9) while the higher rate (R = 7.2%) compounds on a lower base (1 - 20% = 0.8). As a result, you can absorb a bit more of add'l expenses vs. the difference in (effective) tax rates.

Anyways, some other methods will get one pretty close, which may be good enough to decide whether to do it or not. Still, the equations will give you the exact answer.

[malcontent]

It is a progressive rate on the way out, but for the decision to add additional contributions today I’m assuming everything I’ve got in SRS today will “use up” the 15% rate… therefore additional contributions get hit with the higher rate.

Regardless, based on your math, it seems like a much better deal than I would have expected. And, I feel pretty good about S27 with an expense ratio of just 0.09%, and I’ve gotten all of the 30% dividend withholdings refunded on my US taxes so far.

The only remaining frictions are the exchange rate (which UOB has been good on) and the price paid for S27 versus SPY, which is typically around 0.3-0.7% percent premium, but that’s one-time and I don’t intend to sell these shares on the SGX (I will do a cross-border transfer to my US broker for a small fee, avoiding CGT as well).

[NYY1]

@malcontent

Check the tax schedule and math, but what I mean is that I don't think it is possible to end up in the 20% bracket. For example, $640k account balance means $320k is taxable. $320k, which is the end of the 20% (marginal rate) bracket, results in tax of $44,550 or an average rate of 13.9%. If it is based on the maximum of 15% or the resident rate, you'll still be charged 15%.

Hence, above something like $738k/$369k taxable, the marginal rate would be 22% (23% or 24% if the withdrawal amount is higher) and the average rate will start moving above 15%.

Also, above $200k I think they withhold at the maximum rate (24%) and you need to claim back the difference.

[NYY1]

Just curious, given how much stocks (US stocks in particular) have run over the last 10-15 years, does anyone give credence to the forecasts/guesses that equities could return (only) low-to-mid single digits for the next 5-10 years (possibly even negative in real terms)?

Even if one says that's certainly possible, do you do anything different or just stay the course?

Perhaps it is also different based on age. As the years go by, we may build a stronger liquidity buffer or move some assets to fixed income, and that would happen regardless of how stocks are doing.

The last decade+ has been good for stocks but eventually there is going to be a drawdown and a multi-year period where you go nowhere.

Of course, no one can now for sure what will happen...

[smoulder]

Just curious, given how much stocks (US stocks in particular) have run over the last 10-15 years, does anyone give credence to the forecasts/guesses that equities could return (only) low-to-mid single digits for the next 5-10 years (possibly even negative in real terms)?

Even if one says that's certainly possible, do you do anything different or just stay the course?

Perhaps it is also different based on age. As the years go by, we may build a stronger liquidity buffer or move some assets to fixed income, and that would happen regardless of how stocks are doing.

The last decade+ has been good for stocks but eventually there is going to be a drawdown and a multi-year period where you go nowhere.

Of course, no one can now for sure what will happen...

My 2c.

1. There are also predictions that the US stock market will do just fine. Question is who do you trust?

2. From what I recall, the US stock market capitalization is a whopping 70 percent of the entire world. That is the weightage of the US in the MSCI world index.

3. So if one were to look for an alternative country to invest in, I'm not sure what that alternative would be. Furthermore, the chance of other countries delivering similar or worse returns is a high possibility because it's hard to separate them. Of course if someone is an expert stock picker, then there will always be opportunities.... But I doubt most of the folks looking at index funds and ETFs are at that level.

4. Obviously, no one knows for sure how the future will look like. So there is always a possibility that the US market will deliver single digit returns. If so, surely dollar cost averaging into it might still provide decent returns if you have a sufficiently long runway of more than a decade. If your runway is shorter, then anyway you probably need to look out for alternative options other than equities.

[PNGMK]

Jim Rogers gave a talk at a forum I attended about 10 weeks ago. He is very concerned about how over weight US equities are.

[malcontent]

Earnings and speculation are the two key drivers of stock prices. We can’t predict animal spirits, but the current forecast for the S&P500 as a whole is expected to grow earnings by an average 15% in 2025. I would say this is already baked into current price levels which are elevated by historical standards. As 2025 progresses, earnings will come in and future expectations about 2026 will start to form, the rest will depend on overall sentiments. However, I will just say that a healthy correction or two should be expected in 2025, which would bode well for extending the current bull market.

With all of that said, I will just reiterate that nobody knows what will happen, and that is why staying the course is so important. If you study historical market returns, you will see that things can get pretty rough, but that doesn’t happen too frequently, and when it does, recovery is inevitable… and lower prices are a good time buy, not sell.

[NYY1]

Just sharing some data from the end of 1999 to the end of 2024 (covers 25 years of market returns and possibly a peak-to-peak period).

S&P 500:
-Average Annual Return: 9.4%
-Geometric Average Annual Return (CAGR): 7.7%
-Inflation: ~2.5% (there are many different measures of inflation)
-Real Return: ~5.0%

10-Year Rolling Average Annual Return (Geometric):
-Worst Period: -1.0% (no other periods are negative, but two observations are only 1.4% and 2.9%)
-Best Period: 16.6%
-Worst Period (Real Return): -3.4% (two observations are -0.9% and 0.4%, all others are 4.6% or better)
-Best Period (Real Return): 14.1%

No doubt if you rode out the ups and downs and/or kept dollar cost averaging, you got a decent return.

However, if we compare someone that retired at the end of 1999 to someone that retired at the end of 2014, the outcomes are probably quite different. Both may be doing OK if the asset mix was good and/or the withdrawal rate was low enough, but there are likely substantial differences in how the real value of the portfolio grew over the first 10 years of retirement (if one assumes 100% equity allocation and withdrawals to eat, this is an easy calculation to do).

Anyways, as mentioned by others, no one can know for sure what will happen. Still, I think there are big differences between saving/investing for a date that is multiple decades away and managing the assets for consumption (i.e. enter drawdown period).

[malcontent]

@NYY1 has the right way to look at it… most people don’t think in terms of real returns (after inflation). The market has performed well above expectations in recent years and is certainly looking a little frothy as we enter 2025. What should one do in this situation? Focus on your stock allocation and make sure you are comfortable with a double-digit pull back which is bound to happen someone in the next 12 months.

[NYY1]

Just curious, what withdrawal rate are people comfortable with for a 40+ year horizon? And is your goal to just not run out of money or to protect the real value of the portfolio?

Also, does anyone think renting in retirement is a good idea? A paid off house lowers your annual needs and removes a major expense. At the same time, an unleveraged property usually doesn't go up that much per year (3%-4% in a low inflation environment?), so the opportunity cost is quite high.

[NYY1]

Just curious, what withdrawal rate are people comfortable with for a 40+ year horizon? And is your goal to just not run out of money or to protect the real value of the portfolio?

Also, does anyone think renting in retirement is a good idea? A paid off house lowers your annual needs and removes a major expense. At the same time, an unleveraged property usually doesn't go up that much per year (3%-4% in a low inflation environment?), so the opportunity cost is quite high.

I think the marginal analysis on a house is pretty much the same as the entire retirement portfolio.

For example, say I have a $100 house that will appreciate at 3% per year. If I own the house, at the end of Year 1 I have something worth $103 (also need to pay taxes and fees, but those aren't much). If I sell the house, I get $100 and can invest it. Say I earn 8% and rent the house for 3% of the value, in which case I have 105 at the end of year 1. Repeat going forward.

In this case, it's really the same as an entire portfolio with a 3% withdrawal rate. Hence, it is expected return on the funds - rent (withdrawal rate) with the sequence of returns risk (still need to pay rent if the portfolio tanks). I think the other differences and considerations are:
-rent may be much more volatile than inflation.
-owning the house is a 100% direct hedge to what would otherwise be a large expense (not a bad thing).
-With a high enough stock allocation, the unconditional expected value of the portfolio is probably higher, but this comes with increased sequence of returns risk. In contrast, the house is probably something like a 1%-2% real bond.

[malcontent]

Just curious, what withdrawal rate are people comfortable with for a 40+ year horizon? And is your goal to just not run out of money or to protect the real value of the portfolio?

Also, does anyone think renting in retirement is a good idea? A paid off house lowers your annual needs and removes a major expense. At the same time, an unleveraged property usually doesn't go up that much per year (3%-4% in a low inflation environment?), so the opportunity cost is quite high.

The standard rule of thumb safe withdrawal rate (SWR) for a 30 year retirement is 4%.

As you extend beyond 30, the SWR eventually drops to around 3% at the 50 year mark and doesn’t really change much after that. You can find the tables that show this online. These SWR’s require 50-75% equity exposure throughout. If not, the SWR becomes much lower (taking less risk is more risky!)

However, these SWR percentages are for a very basic (rigid) method — take that % on the first year and add inflation each subsequent year.

If you are willing to flex your spend (e.g. forego inflation) in down markets, the SWR can increase by around 50% without any additional risk of portfolio depletion. I intend to use this dynamic method and take a 6% SWR instead.

Keep in mind that any SWR is designed to survive the worst case scenarios in history, so it’s very conservative.

As far as renting, I’m not quite sold on the idea. I still believe that home ownership is a good defense against inflation, and also adds asset diversity into your overall net worth. However, I’m not saying I couldn’t be persuaded otherwise.

[smoulder]

I still have at least 20 years to put this in place, but at the moment my thought is to project how much I think I need every month at retirement age, buffer it and base my total retirement portfolio value off this monthly figure. Then do a 3 percent withdrawal. This would not factor in cpf which would be an additional income on top of the SWR.

Of course, these are just ideas and might change - the other factor would be to have a more conservative asset allocation, focusing on high interest accounts, MMFs and so on to generate at least the bulk of the required monthly income.

[malcontent]

I still have at least 20 years to put this in place, but at the moment my thought is to project how much I think I need every month at retirement age, buffer it and base my total retirement portfolio value off this monthly figure. Then do a 3 percent withdrawal. This would not factor in cpf which would be an additional income on top of the SWR.

Of course, these are just ideas and might change - the other factor would be to have a more conservative asset allocation, focusing on high interest accounts, MMFs and so on to generate at least the bulk of the required monthly income.

SWR only applies to your investment portfolio. CPF LIFE just means a smaller target retirement income that the portfolio needs to support. It’s not recommended to mix the two. It’s also not recommended to go below 50% equity because it can reduce your SWR down to as little as 2%. Keep in mind the real rate of return (after inflation). You need to maintain your purchasing power into the future.

However, if you really wanted to mix the two, CPF dollars would be counted as part of your conservative asset allocation - allowing you to be less conservative with your investments outside CPF. Most people aren’t comfortable with that level of risk, which is the main reason it’s not recommended (Kitces did a great study on this).

[smoulder]

I'm not mixing up the 2 (CPF and retirement portfolio)....