Retirement Planning in Singapore: Does The 4% Withdrawal Rule Still Make Sense?

Human beings like rules. Ok, not really, but we’re likely to make an exception when it offers some kind of assurance, such as a comfortable retirement in our twilight years. Or even just being able to retire. With inflation going up faster than our pay cheques, does the 4% safe withdrawal rule for retirement still make sense?

In the wake of rising interest rates and inflationary fears, you can’t exactly blame people for not being uncertain of their retirement. Heck, Bill Bengen, the US financial advisor who created the  4% withdrawal rule, revealed in a recent study that the figure should probably be revised to 3.3%.

What does retirement look like? Contrary to popular perception, it’s not so much about travelling the world and taking in the sights but more of having the essentials covered.

Moneysense defines it as:

• Have a roof over your head (that is fully paid for)
• Are free of debt obligations
• Have adequate health insurance cover for medical expenses
• Have enough savings or passive income to pay for your retirement lifestyle

Taking into account the above needs, most would be curious as to how much money is considered enough for retirement, followed by “what happens if I outlive my savings?”. It's a very possible scenario given the rate that inflation is rising with no end in sight.

1. How much do you need to retire in Singapore?
2. What is the 4% withdrawal rule for retirement?
3. Using your CPF savings for retirement
4. Build up your CPF retirement sum 
5. Investing for your retirement

Related to this topic: How Much Savings Should I Have By Age — 20s, 30s, 40s, 50s

How much do you need to retire in Singapore?

The official retirement age in Singapore is 63 from 1 July 2022. Based on the average life expectancy here of 85 years for females and 81 years for males, we’re looking at about 20 years of retirement income.

Based on a study on the minimum household budget for elderlies in Singapore, the average household budget per elderly couple is $2,351 per month, and $1,379 for single elderly households to cover basic needs.

A major concern now is whether our CPF Retirement Account savings can keep pace with inflation. Singapore's core inflation has risen further to 5.3% in September this year, with overall inflation expected to average 6%. Sobering times, but all the more reason to start planning early.

In a survey conducted by Manulife over 1,000 Singaporeans aged 21 to over 60 early last year, the average retirement savings for pre-retirees was just S$423,000. That is quite a distance from the projected $600,000 needed based on a monthly income of $2,500.

For a better idea of how much you’ll need for retirement, use this calculator to work out an estimate based on your current expenses.

The best retirement plan starts with setting realistic goals for your retirement savings. For instance, if you foresee travel being a significant recurring expense in your retirement, then $600,000 is surely going to be insufficient.

What’s the biggest expense for most retirees then? Globally, that would be housing, while in Singapore, it is housing and utilities followed by healthcare. Which is why it makes sense to pay off your home loan and downsize according to your family’s needs.

Source: Singapore Department of Statistics

Related to this topic: How To Build Sustainable Retirement Income With Your CPF Money

What is the 4% withdrawal rule for retirement?

Back to the topic, in 1994, Bengen found that the 4% withdrawal rule is the percentage retirees should draw from their retirement funds each year. These funds come from a portfolio that consisted 50% of stocks and 50% of fixed-income securities.

He based his calculations on the S&P 500’s historical performance and found it to be an optimal drawdown rate that could last retirees for about 30 years.

In his latest paper for Morningstar, The State of Retirement Income, Bengen noted that a 4% withdrawal rate may no longer be feasible.

Due to the low starting yields on bonds and high equity valuations, retirees might not receive returns that match those of the past. In addition to lowering the recommended withdrawal rate, he also suggests cutting spending and adopting a more flexible spending approach.

In the study, Morningstar estimates that the standard rule of thumb should be lowered to 3.3% from 4% based on the 50-50 stock and bonds allocation.

Related to this topic: Parents Don’t Have A Retirement Plan? Here’s How You Can Help

Using your CPF savings for retirement

In Singapore’s context, when the topic of retirement comes up, most usually think of Central Provident Fund (CPF) savings.

Ranked 9th out of 44 retirement systems and top in Asia by the Mercer CFA Institute Global Pension Index, the CPF retirement system is designed to cater for retirement, housing and medical needs.

When a Singaporean reaches 55 years old, your Special Account savings, followed by your Ordinary Account, will be transferred to a Retirement Account (RA) up to your Full Retirement Sum (FRS). Here is an overview of the three tiers of retirement sums.

Source: CPF

For property owners, you’ll need to set aside the Basic Retirement Sum. Otherwise, you will need to set aside the Full Retirement Sum before you can start withdrawing.

Build up your CPF retirement sum 

A common gripe is how much the sums are raised every year. For instance, if you’re 30 years old, the Basic Retirement Sum could rise to S$190,000 by the time you turn 55 (based on a conservative 3% year-on-year increase).

If you’ve set aside your Basic Retirement Sum, you can opt to receive a monthly payout from 65 under the CPF Lifelong Income For the Elderly (CPF LIFE) scheme. This applies if you have at least $60,000 in your retirement savings. You may also choose to defer the payouts till you’re 70. With the interest rates

According to the CPF Board, the retirement sums are calculated based on a person's expenditure from a lower-middle retiree household. It’s also based on the assumption that the member owns a property that can last him up to 95 without having to pay rent in retirement. In short, the sums are meant to cover your basic needs in retirement.

Related to this topic: Beginner’s Guide To CPF Retirement Sums And How To Get There (2022)

Investing for your retirement

While not many of us can afford to invest like billionaire investor Warren Buffett or have his acumen, you could take reference from his advice on investing for retirement.

From investing in a low-cost S&P 500 fund to holding on to your investments for the long-term and ignoring market turbulence, it pretty much boils down to having an investor’s mindset.

Given the current bear market conditions, there are opportunities for those who have been waiting to enter the market. You could start by opening an SRS account with either DBS, OCBC, or UOB to gain some tax benefit on your investments.

You can make voluntary contributions of up to $15,300 per year (or $35,700 for foreigners), and the funds are eligible for tax relief up to S$80,000.

You could also contribute to a retirement plan insurance or retirement savings plan (also known as an annuity) which pays out over 15 to 30 years, or over your lifetime. This ensures a sustainable monthly income where dividends can potentially increase by 5-6% p.a.

Lastly, while the CPF interest rates are quite high at 2.5% for the Ordinary Account and 4% for Special Account, they may not keep pace with inflation rates which are currently at a 14-year high.

For those with a 20-30 year investing horizon, consider including the CPF Investment Scheme as part of your investment portfolio. A portion of the funds can be used for approved investment assets including equities, gold, bonds, REITs and investment-linked insurance products.

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