01 July 2019

A Lifetime of Income for Retirement

Recent articles mentioned local survey results which suggested that an aged single could live off $1,379 per month. That works out to be $16,548 annually. A portfolio of $413,700 could generate that income perpetually based on 4% extraction (i.e. annual income needed x 25). But we need to understand that this is for a minimalist lifestyle for a single.

Referencing the last published Department of Statistics report on Household Spendings by Age Group, the average monthly household spending of those aged 50-59 was $4,837 (or $58,044 annually), and drops to $3,586 (or $43,032 annually) for those aged 60 and above.

But these were based on 2012-13 survey data. If we compound these with an estimated annual inflation of 1.5% (inflation has been low in recent years) for 6 years (from 2013 to 2019), the corresponding figures would be $63,468 (aged 50-59) and $47,053 (aged 60+) respectively.

Summary of data points:
For an annual spend of $16,548, perpetual income portfolio is $413,700.
For an annual spend of $58,044, perpetual income portfolio is $1,451,000.
For an annual spend of $43,032, perpetual income portfolio is $1,075,800.
For an annual spend of $63,468, perpetual income portfolio is $1,586,700.
For an annual spend of $47,053, perpetual income portfolio is $1,176,325.

So indeed a household spend of $120,000 annually would be quite a FAT FIRE to retire on. It should be pretty comfortable.
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Somebody mentioned to me that assuming he retires at 65 and lives for another 25 years, he would need $3,000,000!  $120,000 x 25 = $3,000,000.  And if he was to retire earlier, he would need even more. So if he was to plan for 30 years, that would be $3,600,000!

I said no, that's not correct. Using the rule of 4%, he would only need $3,000,000 to generate a perpetual lifetime income of $120,000 annually.  $3,000,000 x 4% = $120,000.

And thanks to a little hack, all thanks to CPF, it's not even necessary to have $3,000,000 to generate $120,000 annually.

6 comments:

Cory said...

Need to include draw down of capital especially for singles.

CreateWealth8888 said...

Are we comfortable with asset draw down towards the last decade of our retirement income for life and that will determine how much to invest before full retirement

Life Finance said...

The 4% withdrawal rate is probably too high given the low interest rate environment the world has been in for the past decade and a half. In the US, many in the FIRE movement choose to use 3.5% as a yardstick instead. In Singapore, as the volatility of the local stock market is much higher than developed markets, the sustainable withdrawal rate has to be even lower, say 2.5% to 3%. All this means that the amount required for retirement is going to be higher.

Lizardo said...

Some risk management is probably helpful. For instance, by holding some cash buffer to top up shortfalls in bear market years. And in years of abundance, keep excess to top up the cash buffer. That could help smoothen the ups and downs from year to year.

If the (long term) returns average out to 7% or more, I think the 4% withdrawal is sustainable as a retirement strategy.

No need to draw down at all. Most welcome alternative views.

Of course, for the absolutely single with no intention to Will to anyone, could draw down. Alternatively, Will the portfolio to a charitable cause?

Anonymous said...

In our late 50s, and near to retiring, this topic is very close to our hearts. My wife and I have run our "numbers" many times under many different scenarios to see if our nest egg will last the distance in meeting our desired lifestyle. In our simulation model, we differentiated the sources of income into:

a. Drawdown source - cash and SRS funds
b. Non-drawdown, non-perpetual - CPF Life and pension (if you have, we dont have pension)
C. Non-drawdown, perpetual - Interest (eg from CPF OA &SA), rental, dividends from stocks

The scenarios we simulated can be broadly categorised into 3 groups:

1. Sunshine scenarios - where the sources of funds are all providing good returns. The returns we used are all based on returns that we have achieved. Meaning we dont extrapolate into future growth but just using the good returns from present and past performance. And inflation rate is benign like in the past few years of 1 to 3%.

2. Nominal scenarios - where the returns from our income sources are average and inflation rates are 2.5 to 3%

3. Nightmare scenarios - where the returns from some investment sources are zero, and inflation rates are above 3% pa.

In the modelling, which covers over a period of upto when are 100 years old (~ 40+ years period), we also varied our expenses along the way. As an example,

All figures are present values
From now till 65, (we expect / want to do a fair bit of traveling) : $160k pa
From 66 to 75, (cut back traveling) : $120k pa
From 76 to 80, : $84k pa
Beyond 81 : $70k pa

The results for the Sunshine scenarios typically showed that our nest egg actually grows even after providing the funds to meet our expected expenses over a 40 year period. In one of the more optimistic sunshine scenario case run, where the inflation rate stays at 1%, while our investment returns are at the highest values that we have achieved in the past, our nest egg actually grew by $2M!!

The nightmare scenarios case runs, which are many and quite scary, showed that our nest eggs would run dry in our 80s. In some cases, by 80 yo. In such scenarios, we would need to cut down on our expenses along the way.

In many of the nominal cases, the results showed our nest eggs either maintained or grew slightly from the amount when we start our retirement.

At the end of the day, these are just simulations and no one can see that far into the future especially our state of health!!

Lizardo said...

Anon,

Thanks for your comprehensive sharing. Really deserve to be a post on its own! *heh*

Totally love the analysis you did. I'm all for examining all the what-if's to assess if the approach can survive different scenarios.

I don't think the portfolio is going to run 0% growth though. Unless you're really making some BAD BAD choices! *Hahah*

I guess if things don't go too well, could cut back a bit on the travelling to tide over?

Fascinating on the extent that you estimate to cut back on expenses over time. I suppose you have medical well covered?