New Way To Plan How Much You Need For Early Retirement | Not 4 Percent Rule!

[@joshconsultancy]

✅ ENGAGE Josh Tan on a fee for financial planning to build towards for your retirement! ►‌ www.theastuteparent.com/josh-tan

[@lynnng6516]

Thanks Josh! Eye opener to learn something new today that’s not 4% rule.. kamsahamida!

[@joshconsultancy]

No probs Lynn =)

[@dehonglim8843]

A mix investment into the A35 and CLR ETFs seems like a stable and steady income stream strategy...

[@joshconsultancy]

It may be too narrow focused I guess?

[@edwintkx]

coin sound keep on making me think my trading UI in the background has hit my limit buy or something :D good info thanks!

[@joshconsultancy]

turn off trading notifications, reduce stress haha =)

[@poisanmok1987]

Great content Josh!

[@joshconsultancy]

Thanks. Check out the retirement playlist =)

[@KaiTheSaltPrince]

Hi Josh, I have some questions regarding the 4% rule. From what I understand, we are able to withdraw 4% of the portfolio to pay off our expenses yearly, yet not touching the original capital sum. However, doesn't this rule not take into account the natural inflation of cost of living? Assuming we are facing a 2% yearly inflation rate, even without lifestyle creep, that initial base capital sum will still need to grow, if we want 4% from that sum to be able to feed our expenditure? Eg. Year 1, expenses is $40,000 yearly, we need $1,000,000 sum invested. But if by Year 5, expenses are around $43300 yearly, we will need ~$1,082,000 sum invested to cover that withdrawal? Hence, shouldn't the initial sum be much higher, so that part of the 4% growth is used to fight inflation? In the case of 2% inflation, shouldn't your initial sum then be $2,000,000? Where out of the 4% growth, 2% is used to reinvest back into the investing sum to fight off inflation, while 2% is used for expenses? This is already assuming that we are not incurring more cost down the road, eg aging parent's medical expenses, house renovation after living in the residential house for over 20 years etc etc. Thus, I am wondering if our base sum invested has to be much higher, to inflation proof this withdrawal method, even if we are using this dynamic withdrawal method. Have been enjoying the content that you have been putting out over the years!

[@joshconsultancy]

Hi Kai Xiang, love the details in the question. #1 "yet not touching the original capital sum" - dont think so. I interpret as 4% of starting pot with increasing amounts for inflation. The capital is expected to last at least 30y which means IT IS CONSUMED. #2 there is actually some deflation in old age spending actually (we no longer have the enthusiasm to drink wine and go concert etc haha). That deflation can be even stronger than living inflation. Hope it helps and think from the perspective of consuming capital more and the equation becomes manageable

[@Phonedumb]

That is why I am thinking of reallocating to 75% reits & business trusts and 25% fixed income. The 75% should be able to grow with time, countering inflation. I personally don't like the decumulation model. If you do the modelling on excel, the impact of compounding in an accumulation mode cuts the other way and the funds deplete very fast

[@joshconsultancy]

@@Phonedumb in retirement age, the language is abit different. Accumulation is not important anymore. If you avoid decumulation the numbers you will need is very big. The question is if the portfolio is not decumulated, who is it left for? Food for thought :)

[@Phonedumb]

@Josh Tan - TheAstuteParent No right or wrong. Just personal preference asking as one is aware of what one is doing. I believe most patents would want to leave behind something for their next generation. But that aside, I just did a quick modelling with a capital of 1mil earning 4% per annum. ($40K/ yr). Assuming one needs $5K/mth for expenses ($60K/yr), that would mean an initial draw down of $20K from the 1mil capital. Now with 980K balance and earning 4% the following year... Factoring in 3% inflation a year, expenses are at $61.8K, meaning a draw down of 21.8K and so forth. The capital is depleted in 20 years. So with longevity risk of living past 20 years, one would be in deep trouble. On top of this, there's still unforeseen advocate expenses like replacement of TVs, fridge, washer, aircons, etc..... my take on decumulation would be towards the end game. Ensure one can live comfortably on dividends & coupons for the most part of retirement. Then maybe the last 5 years of life.... decumulate to pay for additional medical expenses and care. Better to err on the side of caution. Just my take on retirement planning. If done properly with higher yield than 4%, it can go a much much longer way.

[@KaiTheSaltPrince]

@@joshconsultancy Thank for the perspective of consumption of capital (which would make sense for most individuals retiring in their 60s). I am coming from the perspective of a working adult in his 30s, trying to achieve FIRE in his mid 40s. Hence, I did not consider so much of the consumption of capital as I would not want to have fully depleted my initial capital sum at my 70s, as I would be very vulnerable to some form of disability, which might impede my ability to earn income at that age. Would definitely hope you could maybe share more about FIRE in the future, and especially covering some of pitfalls people might come across in their FIRE journey (eg. miscalculations in determining your FIRE sum).

[@orogpd4198]

very informative, thanks.

[@hbu8012]

For retirement, hold some bonds. If stocks are down then cash out from bonds. When market recover cash out from stocks.

[@joshconsultancy]

Works. Bond funds easier than pieces of bonds. You can cash out any amount easily. And more importantly diversified because an individual bond can go bust or lose liquidity in extremes =)

[@Phonedumb]

With local reits (about 6 cointrrs), bonds (2 corporate issues) and shielded CPF SA. Averaging about 5% yield. What is your opinion on its diversification for retirement?

[@joshconsultancy]

Good question, if you've more info to share I could even do an episode to Q&A. Problem is in the total amount (to determine if it produces enough total passive income) and what - "local reits (about 6 cointrrs), bonds (2 corporate issues) " is bought into to determine concentration risk

[@Phonedumb]

@Josh Tan - TheAstuteParent Thanks Josh for your response and offer. I have actually 9 counters of Reits & business trusts. (Manulife, KepPacOak, United Hampshire, ARA-HTrust, Ireit, Ascendas, Netlink & KIT). All about equal weightage of half mil. Another half mil for the 2 pcs of bonds (KepCorp4% & EDF5.625%). Then of course about 225K SA shielded. Is this diversification good enough? It has been tactically allocated as global as possible though mostly domiciled locally. As I'm still working, I plan to allocate some into banks (STI's major weightage) and perhaps our local REIT ETF. What are your thoughts.

[@joshconsultancy]

@@Phonedumb this is great case study. Will prep some pointers via a tutorial. Off hand, I'm surprised why no banks previously or it was sold off? most SG dividend investors start off with banks. Secondly - "tactically allocated as global as possible though mostly domiciled locally." - love this idea from an estate point of view. Third question: what motivates you to still work since you're past 55 and the amounts above is likely enough unless you've a big mortgage loan remaining or your household expenses are above $20k/m (ball park figure)

[@Phonedumb]

@@joshconsultancy I did hold DBS some years ago and sold off for some profits. I then focused on bonds with 90% allocation (with leverage for better returns of ~ 7 to 8%). With them being redeemed over the course of time and nothing worth to buy (even till now), I then went to the next safer option of REITs & business trusts (more forgiving in nature compared to corporate stocks). If you notice, my counters are mostly yielding in excess of 5%, some as high as 8 to 9%. This helps me average up my overall portfolio yield from those investments that yield around 4% (SA shielding & 4% bond). For every dollar yielding say 7.5% to 8% , I can have another 3 dollars invested at 4% to average out close to 5% (just tactics). I've just hit 55 and though my portfolio can get about $60K (5K/mth) presently, I still have some areas to take care of before finally retiring. Bonds are time based, they mature or get redeemed. For EDF5.625%, it'll most likely get redeemed in Jan2024. With the present situation, I can at best get around 4% returns re-invested (bond). That 1.625% diff (250K/pc) = about $4K lesser in coupons. So I need to realistically get my annual passive income to about $65K/yr to mitigate this. I'm not a lavish spender and have my HDB fully paid and can also consider my car as fully paid with a 7 year life to end to COE. But with escalating prices and my kid's education in the equation (afraid the $80K planned withdrawal from FRS is insufficient), I plan to work for another 3 years to get to my $65K/yr passive income target and also perhaps testing out my portfolio's performance. Medical insurance is fully taken care of using CPF-MA's interest (self sustaining). I intend to keep up with the yearly $3K increase till it finally maxes at ~$96K at age 65. That would yield close to $4K yearly interest to cover my medishield life with the supplementary plan from the approved insurer. That is basically my simple retirement plan in a nutshell.

[@TeoChyeHuat]

There might be yet another way to withdraw returns from your portfolio putting too much damage into it. This method is like putting a portion of your portfolio into QYLD or similar covered call strategy ETFs, or simply write the calls yourself if you already are invested into some of the market index ETFs to avoid paying the dividend tax. Average returns of 10+% means you don't need a big portfolio to do this.

[@joshconsultancy]

Selling covered calls caps the upside and also suffers when market turns south. As long as risk is understood, it could also work

[@TeoChyeHuat]

@@joshconsultancy European style options are only exercised on expiry day but no actual selling of the index funds. Options may also be rolled to the next period to cover losses. Depending on the volatility of the index fund, the returns may be lucrative - as seen from the success of QYLD (though value of fund has dropped). Return of 120% dividends/distributions over 10 years with loss of portfolio value of 16% isn't too bad - given that this is for purpose of monthly income.

[@joshconsultancy]

@@TeoChyeHuat QYLD's performance may be enhanced due to the US equity bull from 2009-2022. Cant see data from 2001-2006. It is a period where US equities were pretty poor. Suspect it doesnt work well then

[@TeoChyeHuat]

@@joshconsultancy In my opinion, a bull or bear market does not really affect its performance as the income comes from volatility of the market rather than by the direction. It will fail when one is no longer interested in the market (very difficult for Nasdaq).

[@Phonedumb]

@@TeoChyeHuat This is before the US withholding tax right?

[@money3ss]

4% coined in 1990s it outdated by lower interest rate, high inflation & longer life expectancy. Fallacy of planning around life expectancy figure as it is an average - mean 50% gonna run short.

[@joshconsultancy]

Not necessarily coz equities have done fantastically over the last 10year. It may have balanced the lower bond yield returns

[@money3ss]

@@joshconsultancy 4% rule assume 60% Equity 40% Bond. CPF life is can provide base line, CPF OA/SA - emergency fund, equities/bond - dividend & interest funding remaining retirement expenses (with build in inflation) with no draw down in investment. To be kiasu, model the decumulation without drawdown on capital.

[@money3ss]

@@joshconsultancy Lots of folks keeping in FD and underestimating their expenses. Retirees tend to spend less not because they want to but they have to. Silver Tsunami otw if no proper planning

[@stephenhall4115]

Thanks.

[@singaporefoodreview9591]

Huat ah

[@TheHumbleChartist]

First!!

[@joshconsultancy]

Big thank you THC 👍