Drawdown Strategy

[Hwsemb]

BlueRobin,
You specifically asked about the upcoming issuance of new 10-Year SGS bond NX18100A (deadline for application on 25 Apr 2018, 9pm)

Although you do not know what is the coupon rate going to be, you can sort of estimate it based on the latest 'Yield' of an existing 10-Year SGS bond, when nearing the auction date of NX18100A. If say, on 24 Apr 2018, you checked that the existing 10-Year SGS bond is yielding, for example 2.41%, then you can expect the new NX18100A coupon rate to be around that figure.

 

[BlueRobin]

Hwsemb,

Thank you so much for the info. Your explanation is concise and very helpful for me. The working of SGS Bonds is so different from other corporate bonds where coupon rate is declared before the sale.

For NEW bonds insuance, you will not know the coupon rate upfront. This coupon rate will be determined by our government/MAS during the 'auction date' of the new bond. However, although you do not know the rate, you have the option to select what is the min. coupon rate that you are willing to accept. Meaning, you key in, for example 3.1% minimum, during application at ATM/bank website. So if the actual auction result is a coupon of 2.75%, then you will not get any allocation of the bond. Even if the actual coupon rate is 3.25%, you still may not get it due to oversubscription.

As for re-opened Bond, the coupon rate is already known. However, the bid price for the re-opened bond can be above the par value of 100, for eg. 104. Hence, you will be paying extra premium of 4. This premium will hence, compress your actual yield to be below the coupon rate.

BlueRobin,
You specifically asked about the upcoming issuance of new 10-Year SGS bond NX18100A (deadline for application on 25 Apr 2018, 9pm)

Although you do not know what is the coupon rate going to be, you can sort of estimate it based on the latest 'Yield' of an existing 10-Year SGS bond, when nearing the auction date of NX18100A. If say, on 24 Apr 2018, you checked that the existing 10-Year SGS bond is yielding, for example 2.41%, then you can expect the new NX18100A coupon rate to be around that figure.

 

[BBCWatcher]

OK, couple, age 60, $1.5 million of investible cash, fully paid owner-occupied home (which is the sole asset to be left to heirs), looking for retirement security. Got it.

First of all, that's plenty of cash to take you to age 70 and beyond, so I'd recommend "backloading" your CPF LIFE as much as possible, i.e. defer to age 70 and choose the Escalating Plan when the time comes. Then you've got that much less worry about whether you're drawing down too quickly. Maximize the insurance characteristics of CPF LIFE, in other words, and that'll fit nicely into the overall plan.

Then I'd probably split that $1.5 million at about 40:60 stocks:bonds at your age. For stocks I think I'd put about 30 ($450K) in VWRL and 10 ($150K) in the lowest cost STI fund you can find. (Why VWRL instead of IWDA? Because it generates dividend income, and that's useful in retirement in this case.) The remainder ($900K) in bonds. SSBs ($200K total, although it'll take a couple months to amass that much) work fine, and maybe put another $200K in the 10 year bond coming up for auction in April, 2018. (The 7, 15, and 20 year bonds are fine, too -- you can mix them up a bit.) That leaves $500K-$600K. Is there a low cost, investment grade, medium-term, corporate bond index fund available in Singapore? I don't know, but that's what I'd look for. You could also do $37,740/person CPF top-ups, and that's effectively 2.5+ percent bonds.

 

[BlueRobin]

Thanks BBC for the suggestion!

OK, couple, age 60, $1.5 million of investible cash, fully paid owner-occupied home (which is the sole asset to be left to heirs), looking for retirement security. Got it.

First of all, that's plenty of cash to take you to age 70 and beyond, so I'd recommend "backloading" your CPF LIFE as much as possible, i.e. defer to age 70 and choose the Escalating Plan when the time comes. Then you've got that much less worry about whether you're drawing down too quickly. Maximize the insurance characteristics of CPF LIFE, in other words, and that'll fit nicely into the overall plan.

Then I'd probably split that $1.5 million at about 40:60 stocks:bonds at your age. For stocks I think I'd put about 30 ($450K) in VWRL and 10 ($150K) in the lowest cost STI fund you can find. (Why VWRL instead of IWDA? Because it generates dividend income, and that's useful in retirement in this case.) The remainder ($900K) in bonds. SSBs ($200K total, although it'll take a couple months to amass that much) work fine, and maybe put another $200K in the 10 year bond coming up for auction in April, 2018. (The 7, 15, and 20 year bonds are fine, too -- you can mix them up a bit.) That leaves $500K-$600K. Is there a low cost, investment grade, medium-term, corporate bond index fund available in Singapore? I don't know, but that's what I'd look for. You could also do $37,740/person CPF top-ups, and that's effectively 2.5+ percent bonds.

 

[BBCWatcher]

Why you like to keep telling people to choose CPF Life Escalating Plan....

I already explained why.

 

[raysdad]

OK, couple, age 60, $1.5 million of investible cash, fully paid owner-occupied home (which is the sole asset to be left to heirs), looking for retirement security. Got it.

First of all, that's plenty of cash to take you to age 70 and beyond, so I'd recommend "backloading" your CPF LIFE as much as possible, i.e. defer to age 70 and choose the Escalating Plan when the time comes. Then you've got that much less worry about whether you're drawing down too quickly. Maximize the insurance characteristics of CPF LIFE, in other words, and that'll fit nicely into the overall plan.

Then I'd probably split that $1.5 million at about 40:60 stocks:bonds at your age. For stocks I think I'd put about 30 ($450K) in VWRL and 10 ($150K) in the lowest cost STI fund you can find. (Why VWRL instead of IWDA? Because it generates dividend income, and that's useful in retirement in this case.) The remainder ($900K) in bonds. SSBs ($200K total, although it'll take a couple months to amass that much) work fine, and maybe put another $200K in the 10 year bond coming up for auction in April, 2018. (The 7, 15, and 20 year bonds are fine, too -- you can mix them up a bit.) That leaves $500K-$600K. Is there a low cost, investment grade, medium-term, corporate bond index fund available in Singapore? I don't know, but that's what I'd look for. You could also do $37,740/person CPF top-ups, and that's effectively 2.5+ percent bonds.

Hi BBCWatcher,

I'm now also looking into stock:bond portfolio. Can you roughly estimate based on the above ratio (40:60)
a) How much yield would you reckon one can obtain annually?
b) In the event of a market crash like the one in 2008-2008 (50% drop), would we see drastic drop on portfolio value (I believe it would be less than 50% drop since it is not 100% stock)? Would it be more like 10-20% drop?
c) Do you recommend one lump sum purchase of say TS's SGD 1.5M ?

Thanks!

 

[BBCWatcher]

Ervino, I question your math. However, you apparently fail to comprehend what money and wealth are actually for, what purpose they serve. Maybe as you age (grow up?) you’ll understand better.

I have explained what I recommend in terms of CPF LIFE strategy and why I recommend it. It’s not a complicated explanation. You can disagree with the recommendation if you want.

 

[BBCWatcher]

a) How much yield would you reckon one can obtain annually?

The yield is whatever the yield is. This strategy, including a maximally backloaded CPF LIFE payout stream, should make a 4% drawdown rate quite safe, and with stock:bond allocation rebalancing in mind with that drawdown, i.e. gradually selling some stocks as they appreciate — and probably to shift that allocation more toward 30:70 over time. So, $60,000/year ($5,000/month) drawdown. Dividends/interest should generate most (but not all) of that flow.

b) In the event of a market crash like the one in 2008-2008 (50% drop), would we see drastic drop on portfolio value (I believe it would be less than 50% drop since it is not 100% stock)? Would it be more like 10-20% drop?

Yes, but a 4% drawdown rate should still be safe.

c) Do you recommend one lump sum purchase of say TS's SGD 1.5M ?

The research suggests going “all in” if there’s a sufficiently long enough time horizon to recover. However, the research also suggests the average outcome with an “all in” push is not much different compared to modest dollar cost averaging — say, for example, breaking up the $1.5 million into four chunks and buying quarterly, over the course of one year.

The reality is that particular attractive bonds — such as Singapore government bonds — don’t come up for sale every day. There will be some lag in moving into position for this reason alone. That’s OK. Also, psychologically it can be tough if you buy a chunk of stocks that then suddenly fall in value, even if it’s true that you’re going to be holding most of those stocks for 10+ years into the future. So if you want to engage in some “light” dollar cost averaging to move into position — four quarterly buys over a year, for example — that’s fine.

 

[raysdad]

The yield is whatever the yield is. This strategy, including a maximally backloaded CPF LIFE payout stream, should make a 4% drawdown rate quite safe, and with stock:bond allocation rebalancing in mind with that drawdown, i.e. gradually selling some stocks as they appreciate — and probably to shift that allocation more toward 30:70 over time. So, $60,000/year ($5,000/month) drawdown. Dividends/interest should generate most (but not all) of that flow.


Yes, but a 4% drawdown rate should still be safe.


The research suggests going “all in” if there’s a sufficiently long enough time horizon to recover. However, the research also suggests the average outcome with an “all in” push is not much different compared to modest dollar cost averaging — say, for example, breaking up the $1.5 million into four chunks and buying quarterly, over the course of one year.

The reality is that particular attractive bonds — such as Singapore government bonds — don’t come up for sale every day. There will be some lag in moving into position for this reason alone. That’s OK. Also, psychologically it can be tough if you buy a chunk of stocks that then suddenly fall in value, even if it’s true that you’re going to be holding most of those stocks for 10+ years into the future. So if you want to engage in some “light” dollar cost averaging to move into position — four quarterly buys over a year, for example — that’s fine.

Thanks for reply. I am a little confused by " 4% drawdown rate" being "safe". What is safe? Is this strategy

a) about capital preservation and drawing out only the "yield" (that is would TS still have 1.5M at the end?) or
b) slowing down the drawdown rate.

 

[SBC]

In my simple opinion, safest to choose the mainstream option.

 

[BBCWatcher]

Thanks for reply. I am a little confused by " 4% drawdown rate" being "safe". What is safe?

The goal is simple: supporting a retirement lifestyle from age 60 onward. In other words, to be able to spend $X/year (2018 dollars) for the rest of their lives no matter how long those lives last.

So, to fulfill that goal, I recommend taking the $1.5 million of investible capital, allocating it about 40:60 to stocks:bonds (to start) as outlined (which is age appropriate), backloading CPF LIFE payouts as maximally as possible (age 70 start date, Escalating Plan -- to maximize longevity insurance protections, which is the major risk element here), and using a 4% drawdown rate. (If $5,000/month is "too much," it's OK to draw down less.) The yield is whatever the yield is, but it's probably less than 4%. So there will be some gradual spending of principal in this scenario, and that's perfectly fine -- a 4% drawdown rate should be quite sustainable in this scenario.

I would not go to 5%. That's a bit too aggressive, in my view.

The 4% drawdown rate is a "rule of thumb" for retirement, based on a lot of studies and analysis. Recent evidence suggests that 4% might be a little too aggressive, and that's why I'm recommending backloading CPF LIFE payouts as much as allowed in order to claw back the 4% "rule of thumb" and make it safe again.

 

[BBCWatcher]

In my simple opinion, safest to choose the mainstream option.

What does this post mean? Everything I'm recommending is quite mainstream.

 

[BBCWatcher]

Again empty subjective talk, flowery but without the math to back up your claim that CPF Life Escalating Plan is better than CPF Life Standard and Basic.

The simple fact is that deferring to age 70 and choosing the Escalating Plan, together, maximize the longevity insurance aspect of CPF LIFE. And maximizing the longevity insurance value is the strategy I recommend here, because the desired goal is simple and straightforward: retirement security.

Other goals are not desired, for example to attempt to maximize a bequest to heirs. That other, different goal was specifically ruled out all the way at the beginning. Perhaps you missed that.

 

[raysdad]

... and that's why I'm recommending backloading CPF LIFE payouts as much as allowed in order to claw back the 4% "rule of thumb" and make it safe again.

Thanks. Interesting strategy.

 

[BBCWatcher]

Interesting strategy.

It's kind of boring, actually. But boring is good.

If a particular X% drawdown rate proves to be too aggressive, then that problem will manifest itself not today, or even tomorrow, but in the "out" years -- toward the end of life. That's easy to fix: CPF LIFE, age 70, Escalating Plan. Push as much of the lifetime annuity cash to the out years, to reduce the risk of outlasting today's $1.5 million principal. Then pick a still prudent drawdown rate, an age-appropriate portfolio allocation, and you're fine.

This isn't rocket science, really. Yes, I know, there are plenty of people around who will try to make these things more complicated -- we might have one in this thread right now -- but it really isn't.

 

[ceciltan]

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

Go buy all into reits now. At reasonable 6% yield pa. You get 7500 monthly, dun even need to draw down. Your capital stay intact. Simple to implement and dun need constant monitoring of the market. Every month just wait collect money only. If you got children, they love you for this as you maintain your capital to hand over to them.

Edit, market a bit bear now. Maybe just hold cash and wait for crash since you only start to need the money in 5 yrs time. If you lucky and get in at a Low price, we could be looking at a possible higher yield which mean even more money monthly.

 

[sAVaGEmP5]

Just put in several high interest cash account. Interest rates will prob hit 4% in SG by 2020.

Thats alot of cash generated risk free. If u go and invest stocks or bond fund now ? Good luck to you once the funds are rotated out by others.

 

[BBCWatcher]

Go buy all into reits now.

Yes, and if the real estate market were to crash any time within the next couple decades, that'd be disaster. Why such extremist advice? It's inappropriate for the circumstances.

A sustained 6% yield might be possible, but there's absolutely no guarantee that'll happen -- and it's rather unlikely. A $5,000/month (2018 dollars) income assumption on a $1.5 million investment is a much more reasonable, responsible drawdown plan -- and with a much more secure investment profile to go along with it.

Retirement ought NOT be a gamble.

Just put in several high interest cash account. Interest rates will prob hit 4% in SG by 2020.

"Prob(ably)" is not a secure retirement plan.

 

[JuniorLion]

If you look at CPF Life, you would know that it is worst than putting our money into a bond fund that pays 4% p.a. or more interest! So, anybody who has $1M and above can create their longevity insurance, don't need CPF Life!

Assume a person has $1.5M (like TS), put into a bond fund paying 4% p.a., that means he will get $60,000 a year from the investment, without touching the capital.
That means he will have $5000 a month to spend, without touching his capital and he can pass down his $1.5M to his descendents! This is the best longevity insurance TS could have (than CPF Life)!

Please do kindly share with us which AAA Bond has 4% yield. I must start learning how to invest in them too.

 

[sAVaGEmP5]

Yes, and if the real estate market were to crash any time within the next couple decades, that'd be disaster. Why such extremist advice? It's inappropriate for the circumstances.

A sustained 6% yield might be possible, but there's absolutely no guarantee that'll happen -- and it's rather unlikely. A $5,000/month (2018 dollars) income assumption on a $1.5 million investment is a much more reasonable, responsible drawdown plan -- and with a much more secure investment profile to go along with it.

Retirement ought NOT be a gamble.


"Prob(ably)" is not a secure retirement plan.

So how do you secure a retirement plan Mr BBCwatcher ?? Seems like you are insecured and you need to have the last comment and say on everything.

Oh ya btw, the citibank maxigain is guaranteed @ >2.2% now.