Drawdown Strategy

[BlueRobin]

I'm new here.

My wife and I are near retirement, we have accumulated $1.5 mil in cash.

The drawdown would start in about 5 years and continue for the next 25-30 years. Since we did not built a stock/bond portfolio in the past and all our money are in cash, what sort of drawdown strategy would you recommend?

Would love to hear your opinion. TIA

 

[Retribution]

HI,

If you don't mind, care to tell how old are you and your wife.

Also, if you could provide where the cash is coming from, e.g. CPF Life, bank , high yield savings account etc...

All that helps for others to respond to your question.

I'm new here.

My wife and I are near retirement, we have accumulated $1.5 mil in cash.

The drawdown would start in about 5 years and continue for the next 25-30 years. Since we did not built a stock/bond portfolio in the past and all our money are in cash, what sort of drawdown strategy would you recommend?

Would love to hear your opinion. TIA

 

[BlueRobin]

HI,

If you don't mind, care to tell how old are you and your wife.

Also, if you could provide where the cash is coming from, e.g. CPF Life, bank , high yield savings account etc...

All that helps for others to respond to your question.

We are both 60 years old.

The cash was from our investment in property that was enbloc.

The 1.5 mil is on top of what we will be receiving from CPF Life.

We are thinking that for planning purpose a 3% inflation would be the assumption and that we are hoping to withdraw $5,000 (the value of money when we are 65).

We live in a fully paid home. No intention of selling as well.

Hope this additional info helped.

 

[mynickname]

Should put half in something that has some form of return preferably with no or little risk.

The rest hold cash.

Should have a good retirement

 

[shareholder]

can consider putting 10-20% in sti etf and slowly diversify the rest into sgs bonds of different maturity. At 60, the priority is on how to build up the ultimate health, and pursue a mentally engaging hobby. Have to keep the mind in the optimum condition.

 

[BlueRobin]

You need to tell us how much you can receive from CPF Life at 65 years old. That will also make a big difference.
How long do you target your fund to long? 90 years old?
What is your expected return for your fund that has not drawn down yet?

Combined CPF life pay out will be around $3,000.

I wish I know how long I will live but the average life span for Singaporean these days is 85? Because of the uncertainty, that is why I wish to hear opinion on how best to plan the cash that I have.

With inflation at 3%, I would hope to beat inflation and bonus if I could have a moderate gain of 2%.

Besides what I have mentioned, assume I do not have other fund to drawdown from.

 

[BlueRobin]

can consider putting 10-20% in sti etf and slowly diversify the rest into sgs bonds of different maturity. At 60, the priority is on how to build up the ultimate health, and pursue a mentally engaging hobby. Have to keep the mind in the optimum condition.

Should put half in something that has some form of return preferably with no or little risk.

The rest hold cash.

Should have a good retirement

Thanks for your suggestions.

 

[Soul77]

How about putting all in A35 (ABF SG Bond) So far it gave about 2.x% return yearly.

I did some calculaton, even at 2% return and 3% yearly inflation of $5000 monthly, this amount should last you for 25 years. Provided you start now (or get something that can give you at least 2%) and reinvest back all the dividend.

 

[BlueRobin]

How about putting all in A35 (ABF SG Bond) So far it gave about 2.x% return yearly.

I did some calculaton, even at 2% return and 3% yearly inflation of $5000 monthly, this amount should last you for 25 years. Provided you start now (or get something that can give you at least 2%) and reinvest back all the dividend.

Thanks! I did up a simple spreadsheet using your suggestion to look through the numbers.

 

[Maeda_Toshiie]

At your age, you are not looking at making great gains, but to keep pace with inflation and possibly passing on your legacy to your heirs (this is an important consideration). If you want to pass on your wealth (if you have heirs) and your needs are not particularly luxurious, you can possibly live off dividends thrown off by the portfolio. The STI throws off roughly 3% p.a*., and the US S&P500 throws off roughly 2% p.a. (after the withholding tax, I think). You can even allocate some to form a REIT ETF portfolio that can give >4% p.a..

On the other hand, if you aren't going to leave anything behind, a 3 or 4% drawdown rate is fine. 4% is, IMO, on the aggressive side with projected economic growth, so I'd personally prefer 3%. Besides, you do get CPF payouts, so I don't think you are short on funding your retirement. Buying a Greek island is not included.

Under (conventional) portfolio theory, you should hold still some stocks even at your current age. 10 year Singapore sovereign bonds are not going to beat inflation. For the stock component, see below.

Unless you have a track record of successful stock picking, avoid that and instead simply put inside low cost passive index funds like the STI (ES3 or G3B) and probably one to cover the rest of the world (eg. IWDA or VWRL listed on London). Individual stocks can crash and never recover, but the general market (tracked by the index) will as the economy recovers.

How do you allocate b/w stocks and bonds? Warren Buffett said that when he is dead, his wife should just hold 90% stocks (in the S&P500) and 10% bonds. That is probably not acceptable for most people as they are unlikely to manage that big of a portfolio that they can still live off dividends paid out even when the market is down 50%. John (Jack) Bogle himself holds 2/3 stocks (again in the S&P500) and 1/3 bonds, though has moved a 50-50 split recently, probably due to the relatively higher valuations of US stock market. He's 88 right now with a heart transplant ~20 years ago. Note that they are only vested in the US stock market, which behaves quite differently from ours.

If you wish to use the 100-age or 110-age stock allocation rule, 50-50% is about right, and you can move downwards in stock allocation if you so wish. Of course, if you wish to leave behind more money for your heirs, maintaining 50-50 is still reasonable given your portfolio size**.


* Clearly, this depends on market conditions. You can take a look at the performance of the STI and the dividend payouts of the two index funds tracking it.
** I know Shiny may not agree with this.

 

[BlueRobin]

Based on your described figures, your fund can last you till 90 years old if you withdraw only $5000 p.m. starting at age 60 and with an inflation rate increase of 3% p.a., assuming the rest of your fund not withdrawn yet can earns at least 2.0% p.a.

You can see the calculation here:

By the way, I don't believe in the so-called "4%" draw-down rate or something like that because they are just too simplistic and doesn't take into account inflation rate (of the place you live in), your achievable investment return rate (if you can achieve higher return means your fund can last longer), and your CPF Life payout.

Thanks so much!

I looked at your calculation, could the formula had included the CPF Life payout as one of the fund used during retirement? My simple spreadsheet would have me ran out of money at 2% dividend and 3% inflation after about 22 years. In any case, I get the gist of your suggestion. Thanks again.

 

[Soul77]

Thanks so much!

I looked at your calculation, could the formula had included the CPF Life payout as one of the fund used during retirement? My simple spreadsheet would have me ran out of money at 2% dividend and 3% inflation after about 22 years. In any case, I get the gist of your suggestion. Thanks again.

That's why you should make sure your 1.5M is making at least 2% from now. So by the time you retire (5 year later), it should compounded to at least 1.65M. Based on my calculation, this will last you about 24.5 years. Btw, 5000 + 3000 (CPF life) / month is a pretty big number for retiree (assuming just you and spouse). Provided you don't overspend. You can join travel every month and still have spare.

 

[raysdad]

I'm new here.

My wife and I are near retirement, we have accumulated $1.5 mil in cash.

The drawdown would start in about 5 years and continue for the next 25-30 years. Since we did not built a stock/bond portfolio in the past and all our money are in cash, what sort of drawdown strategy would you recommend?

Would love to hear your opinion. TIA

Congrats and well done on savings... can share how you currently "work" your 1.5 mil cash? Thanks.

 

[havetheveryfun]

no offence to other SSI peeps but you should probably look for someone else who has that amount of money to ask for advice instead of people who don't even have 1 million.

After all, those people who have had that amount of money or more would probably have gone through the same thinking process as you and would be able to give you their opinions or even their current lifestyle (how they make use of this 1.5 million for their lifestyle) .

 

[BlueRobin]

Thanks for taking the time to response to my query.

You are right that I am looking for safe instrument to see out the rest of my retired life with the savings that I've got. I do not intend to leave any cash to my children; they can have our home when both my wife and I passed on.

Noted on your 3% drawdown suggestion.

It seems like ETFs are the fav recommendation and I can understand why. If I understood your message here, it would be for me:

1. A matter of the proportioning equity/bond etf based on age
2. Adjust accordingly as needs and/or economic situation changes

I think (1) is easy to follow and also easy to communicate to my wife so that she could take over the rebalancing should I leave this world first.

Point (2) however may be a challenge as we age, cognitive ability comes into question.

There is also a third consideration is on the strategy on either a lump sum (the whole of my 1.5mil) gets invested at one go or spread it out (but for how thin)?

I am hoping that if I do this right, I should have a fairly worry-less retirement.

At your age, you are not looking at making great gains, but to keep pace with inflation and possibly passing on your legacy to your heirs (this is an important consideration). If you want to pass on your wealth (if you have heirs) and your needs are not particularly luxurious, you can possibly live off dividends thrown off by the portfolio. The STI throws off roughly 3% p.a*., and the US S&P500 throws off roughly 2% p.a. (after the withholding tax, I think). You can even allocate some to form a REIT ETF portfolio that can give >4% p.a..

On the other hand, if you aren't going to leave anything behind, a 3 or 4% drawdown rate is fine. 4% is, IMO, on the aggressive side with projected economic growth, so I'd personally prefer 3%. Besides, you do get CPF payouts, so I don't think you are short on funding your retirement. Buying a Greek island is not included.

Under (conventional) portfolio theory, you should hold still some stocks even at your current age. 10 year Singapore sovereign bonds are not going to beat inflation. For the stock component, see below.

Unless you have a track record of successful stock picking, avoid that and instead simply put inside low cost passive index funds like the STI (ES3 or G3B) and probably one to cover the rest of the world (eg. IWDA or VWRL listed on London). Individual stocks can crash and never recover, but the general market (tracked by the index) will as the economy recovers.

How do you allocate b/w stocks and bonds? Warren Buffett said that when he is dead, his wife should just hold 90% stocks (in the S&P500) and 10% bonds. That is probably not acceptable for most people as they are unlikely to manage that big of a portfolio that they can still live off dividends paid out even when the market is down 50%. John (Jack) Bogle himself holds 2/3 stocks (again in the S&P500) and 1/3 bonds, though has moved a 50-50 split recently, probably due to the relatively higher valuations of US stock market. He's 88 right now with a heart transplant ~20 years ago. Note that they are only vested in the US stock market, which behaves quite differently from ours.

If you wish to use the 100-age or 110-age stock allocation rule, 50-50% is about right, and you can move downwards in stock allocation if you so wish. Of course, if you wish to leave behind more money for your heirs, maintaining 50-50 is still reasonable given your portfolio size**.


* Clearly, this depends on market conditions. You can take a look at the performance of the STI and the dividend payouts of the two index funds tracking it.
** I know Shiny may not agree with this.

 

[BlueRobin]

Congrats and well done on savings... can share how you currently "work" your 1.5 mil cash? Thanks.

As I just gotten the money not too long ago, it is essentially earning minimal interests sitting in bank accounts. Until I figure out what to do with it, this arrangement is fine for me for now.

 

[BlueRobin]

no offence to other SSI peeps but you should probably look for someone else who has that amount of money to ask for advice instead of people who don't even have 1 million.

After all, those people who have had that amount of money or more would probably have gone through the same thinking process as you and would be able to give you their opinions or even their current lifestyle (how they make use of this 1.5 million for their lifestyle) .

Perhaps I should clarify that the reason I came here to seek opinions is so that I can hear what other's might do if they are in similar situation. It is not very different should one suddenly have access to a sum of money at any given age in whatever social status they are in.

Based on the responses I got so far, the ideas that were shared here seem to centered around a straight drawdown approach. Meaning, invest in ETFs and drawdown x% a year and rebalance every so often based on parameters comfortable to themselves.

This idea is good and simple to implement.

I have also seek others' opinion elsewhere and the "bucket" approach was mentioned. Far more complicated and require more complex instruments as each bucket would mature in different time horizon and will take on different risk levels.

Ideally I would love to hear from people who have already "been there done that" but I don't have any friends in my circle that is in similar situation that is why I am expanding my homework to this forum.

 

[intime]

Some of the less riskier instruments I could think of...
Singapore savings bonds
Singapore government securities
Abf sg bond fund
CPF voluntary contribution
99 years or lifetime annuity policies

 

[tomentus]

I would reccomend putting into Singapore Bonds, either savings bonds or SGS bonds. You are so close to retirement, I do not think you should be putting into stocks and since you are retiring you will be looking at your stocks daily and worrying. You should be enjoying your retirement.

Granted Govt bonds, (no junk bonds) do not give great interest rates, but they are better than leaving it in the bank.

 

[Soul77]

As I just gotten the money not too long ago, it is essentially earning minimal interests sitting in bank accounts. Until I figure out what to do with it, this arrangement is fine for me for now.

How much interest you're getting? maybe put it into CIMB StarSaver for the time being. Earning 0.8% interest of 1.5 Mill is $1000 / month. pretty good money. Until you know what to do with it.