Retirement Funding Optimization

[malcontent]

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

The thing I often see in Singapore is the tendency to under-allocate to equity and over-allocate to safer investments. This is ok if you’ve got a larger portfolio that can support a lower SWR. There are tables published that show what happens to the SWR when you allocate, 25% or even 0% equity.

[NYY1]

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.

At one point, I wrote my own code to do all of this stuff, so I am familiar with the general output. Now, there are a lot of free resources online that work pretty well too. In addition to backtesting, I also like to simulate resampled returns/inflation, but that is just out of curiosity (generally, the average won't change but you'll get some better and worse outcomes). If I recall correctly, 4% actually fails 5%-10% of the time over 30 years?

I generally agree that one should keep a healthy exposure to equities in retirement (edited). I’ve usually looked at 60/40, 80/20, and 100/0. If you get some of the worst sequences, 60/40 will perform better. However, in many cases, especially as you go past 30 years, there is a good chance 60/40 will lose value in real terms (some people may be OK with that).

If you drop the withdrawal rate down to 3% and get some of the worst sequences, the real portfolio values (decades later) tend to be similar (edit: and growing), although the drawdowns are clearly different. And of course, the higher equity weightings will do better if you get good returns up front.

As for the dynamic withdrawal rates, I understand the logic and math and the decision can make sense for people. At the same time, I'm not sure I want to flex down, especially in the early years when one can do more (travel, leisure, etc). But if one is constrained, that means you need to consume less, so I guess it depends.

As for housing, probably the prudent thing is to own it outright and reduce your cost number, even if it is a lower expected value outcome. Inflation is one of the biggest risks to a retiree (no wages to re-price with inflation) and housing is likely very correlated to that (at least in the intermediate term). Maybe at that stage of life the goal is to take left-tail risk out of the equation and avoid problems (I'm not sure yet).

If someone wants to own bonds in their mix, I've wondered whether rental properties are a better choice? Essentially a real bond that will re-price every 1-2 years with inflation and wages. I think the problems are a) one or a couple/few properties are not diversified (vs a portfolio of bonds) and b) it's just a pain/hassle.

[smoulder]

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

The thing I often see in Singapore is the tendency to under-allocate to equity and over-allocate to safer investments. This is ok if you’ve got a larger portfolio that can support a lower SWR. There are tables published that show what happens to the SWR when you allocate, 25% or even 0% equity.

Which is exactly what I was suggesting above. For me, the safety net (when I retire) isn't just about high allocation of conservative assets, it's also about building up a sufficiently large portfolio as well.

[NYY1]

I was looking at some financial market data again today (US markets so ignores currency for non-USD based consumers). I think these figures have been pretty consistent over time (a range is given, as it depends on exactly what timeframe you look at):
-Cash = ~0.0% - 0.5% real return (negative the last 25 years)
-10YR Gov't Debt: ~1.0 - 2.0% real return (often closer to 1%)
-Stocks: ~7.0% real return (last 25 years have not been very good at ~5%)

Interestingly, from both post-WW2 and 1970 to current, the small cap premium is essentially gone. Over the last 25 years, it is about 1% or half of what it was before the turn of the century.

Also, over the last 25 years gold has actually outpaced the S&P 500.

[malcontent]

The retirement spending “smile” is another important factor to consider. That is where spending in early and late retirement tends to be higher and drops in the middle.

My parents retired in their 50’s (lots of travel) and have just hit the bottom of the smile in their 80’s (almost no travel now), but healthcare costs will likely increase as they push into their 90’s. They have no desire to prolong their life, but they’d prefer to “check out” at a similar age to one another.

[NYY1]

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

The thing I often see in Singapore is the tendency to under-allocate to equity and over-allocate to safer investments. This is ok if you’ve got a larger portfolio that can support a lower SWR. There are tables published that show what happens to the SWR when you allocate, 25% or even 0% equity.

Which is exactly what I was suggesting above. For me, the safety net (when I retire) isn't just about high allocation of conservative assets, it's also about building up a sufficiently large portfolio as well.

I re-read some of the replies. Just to clarify, a very conservative asset allocation means the portfolio can only support a low withdrawal rate.

However, the converse isn't true. If the withdrawal rate is naturally low (low spending relative to the portfolio's size), one can just stick with an aggressive asset allocation to hopefully grow the portfolio (in real terms).

At higher withdrawal rates, aggressive asset allocation will suffer (relatively speaking) if the bad returns happen upfront (one may still survive). But if the withdrawal rates are low enough, eventually the portfolio will recover and earn more even if the bad returns happen upfront.

You probably know all of this - I'm just clarifying based on some of the responses. Nevertheless, there is a difference among a) trying to not run out of money, b) maximizing consumption while not running out of money, and c) consuming and maintaining/growing the portfolio in real terms.

[malcontent]

I re-read some of the replies. Just to clarify, a very conservative asset allocation means the portfolio can only support a low withdrawal rate.

However, the converse isn't true. If the withdrawal rate is naturally low (relatively low spending), one can just stick with an aggressive asset allocation to hopefully grow the portfolio (in real terms).

At higher withdrawal rates, aggressive asset allocation will suffer (relatively speaking) if the bad returns happen upfront (one may still survive). But if the withdrawal rates are low enough, eventually the portfolio will recover and earn more.

You probably know all of this - I'm just clarifying based on some of the responses.

I could never convince my parents to keep more than 10-20% in equities. They don’t see the point because they have more than enough and don’t want to put what they have at risk. They would have been far better off had they done so, they know this… but couldn’t care less.

This is the price one pays for peace of mind.

[smoulder]

I re-read some of the replies. Just to clarify, a very conservative asset allocation means the portfolio can only support a low withdrawal rate.

However, the converse isn't true. If the withdrawal rate is naturally low (relatively low spending), one can just stick with an aggressive asset allocation to hopefully grow the portfolio (in real terms).

At higher withdrawal rates, aggressive asset allocation will suffer (relatively speaking) if the bad returns happen upfront (one may still survive). But if the withdrawal rates are low enough, eventually the portfolio will recover and earn more.

You probably know all of this - I'm just clarifying based on some of the responses.

I could never convince my parents to keep more than 10-20% in equities. They don’t see the point because they have more than enough and don’t want to put what they have at risk. They would have been far better off had they done so, they know this… but couldn’t care less.

This is the price one pays for peace of mind.

I think the word conservative is relative 10 to 20 percent for me would be waaay too conservative even for a retiree... In my opinion.

PS - I'm actually not conservative in the current phase which is the building phase. When I talk about conservative, it's a future hypothetical phase.

[NYY1]

I re-read some of the replies. Just to clarify, a very conservative asset allocation means the portfolio can only support a low withdrawal rate.

However, the converse isn't true. If the withdrawal rate is naturally low (relatively low spending), one can just stick with an aggressive asset allocation to hopefully grow the portfolio (in real terms).

At higher withdrawal rates, aggressive asset allocation will suffer (relatively speaking) if the bad returns happen upfront (one may still survive). But if the withdrawal rates are low enough, eventually the portfolio will recover and earn more.

You probably know all of this - I'm just clarifying based on some of the responses.

I could never convince my parents to keep more than 10-20% in equities. They don’t see the point because they have more than enough and don’t want to put what they have at risk. They would have been far better off had they done so, they know this… but couldn’t care less.

This is the price one pays for peace of mind.

I think I edited my post at the same time as you replied. Basically, they maximized a), and I guess whatever any individual (or couple) decides to do is up to them. Probably the best thing you can say is that they didn't ramp up the stock exposure and then ramp down at the wrong time. I think most people will be OK if they build a sensible plan and stick to it. Whether they could have done better is some combination of both playing the odds and luck.

Nevertheless, I do think many of the "old rules" or ways of thinking are terrible for younger people with increased longevity and more self-financing of retirement. There is certainly more awareness towards b) and c), but I would still say some of the literature, financial articles, and often talked about ideas aren't very good.

[NYY1]

There are a lot of different concepts briefly mentioned in the article/video. Some here are probably familiar with them, but if not, this is a decent place to hear a bunch of terms and then search for more information.

Ultimately, it's unlikely there is one plan that fits everyone. A combination of resources, risk preferences, objectives, willingness to adjust, and horizon will shade things one way or the other. There's also some luck as to what the market does when you no longer have a paycheck.

https://sg.finance.yahoo.com/news/the-4 ... 42257.html