Retirement planning: Chickens, eggs, and investing for retirement in Singapore

Evidence-based retirement planning

Growing and sustaining your wealth through systematic investing

Clients often tell us that they want to jumpstart their retirement planning and that they have a target amount in mind. That is only half the battle, or should we say beauty, of being invested.

How we invest from retirement to death is critically important to sustaining our lifestyles, beating inflation, and improving our ability to live better.

In life, you have two "chickens"

One is the "Work Chicken" - this is you - your work, creativity and labour are translated into the money you make from your efforts. We call this "human capital". The number of eggs the work chicken produces typically grows through your working life (as your salary increases), but will slow down as you reach retirement.

Then you have your "Wealth Chicken" - the money you accumulate, save, inherit (if any), and invest. We can call this financial capital. The number of eggs it produces is relative to the size of the chicken (amount of capital accumulated) and the quality of the food you feed it (how you invest it).

Both of these chickens produce eggs (money) at varying speeds throughout life and should cross paths at some point. For the over-simplified example provided below of the very diligent investor, passive wealth income is expected to overtake work income at the age of 52.

Have an evidence-based retirement plan: investing only until retirement is the equivalent of killing your chickens and only being left with eggs

Life expectancy is 85 years in Singapore and trending upwards every year. This is great news. But what this also means is that our money must last longer.

Decumulation, the drawing down of financial capital, is a phase of life we often associate with retirement planning. This drawdown will likely happen at an increasing rate, keeping pace with inflation and unfortunately more healthcare costs, in order to maintain a standard of living.

For example, if you are 65 and spending $60,000 per year ($5,000 a month), when you are 85, assuming an average of 2% inflation, you will need $89,156 per year to maintain the same quality of life.

This makes the management of your "Wealth Chicken" extremely important through decumulation.

You have a couple of options for your "Wealth Chicken".

1. Kill the chicken, and store the eggs: No investment and put the money under your mattress, or in the bank, earning next to no interest.
2. Feed the chicken a little bit but with almost no risk: Leave your money in your CPF Ordinary Account, earning an interest of 2.5%, or in the CPF Special Account or Retirement Account, earning an interest of 4%, assuming the interest rates do not change.
   ‍(Note: On 29 May 2023, it was announced that the SA and MA interest rate will increase to 4.01% for the period from 1 July 2023 to 30 Sept 2023. Learn more about CPF interest rates here.)
3. Feed the chicken more but take on more risk: Invest your money in a moderate portfolio of globally diversified stocks and SGD-hedged bonds (we use 60% stocks and 40% bonds for this example)
4. Let the chicken run free-range in the hope of many golden eggs while taking on a greater level of risk: Invest your money in a globally diversified portfolio of 100% stocks

Before we get into some statistics, you have to make a strategically crucial decision in trying to maximise your probability of success of not running out of money while not pinching your pennies beyond reason and still being able to live.

1. Select a reasonable rate of decumulation (or eating your eggs), taking inflation into account (your cash flow),
2. Decide on how much volatility you can tolerate (based on your own personality and behaviour), and
3. Understand the risk of running out of money.

Now, let's say you have $1 million at retirement and need it to last 30 years. We tested three different withdrawal rates - 5% ($50,000 per year), 4% ($40,000 per year), and 3% ($30,000 per year) - and adjusted these withdrawal amounts for inflation over time.

A withdrawal rate of 5% is aggressive, with the probability of a 100% stocks or balanced 60% stocks and 40% bonds investment portfolio lasting 30 years to be 65% to 70%. That being said, you are better off investing (and more aggressively) than not if you want any chance of success in sustaining this withdrawal rate for 30 years. There is no chance of success if left earning a guaranteed interest rate of 4%, or 2.5%. A portfolio of 100% stocks has a dramatically higher media median ending value at over $1.1 million.

By reducing withdrawals to 4%, it is clear that investing does bear some risk, but with a very high success rate of lasting 30 years, and a much more significant median ending value to pass on to your loved ones (over $2.2 million). Leaving money earning 2.5% p.a. or less will run out of money in under 30 years.

By reducing withdrawals to 3%, the chances of running out of money by investing are very low. The ending value to pass on to your loved ones is significant, at multiple times your initial capital.

Represented differently, see below a graphical depiction of the disbursement of projected outcomes for the 4% withdrawal rate, followed by the simple median outcome of the five options presented for your Wealth Chicken.

Not investing, in the case of any withdrawal rate, is never the best option. Don't kill your Wealth Chicken. Put it to work.

Note: Results for 100% stocks portfolio, and 60% stocks and 40% bonds portfolios are based running 5,000 Monte Carlo Simulations constructed from underlying correlated Gaussian distributions of SGD monthly returns of the MSCI ACWI NR and BBgBarc Global Aggregate TR SGD-Hedged from 1990 to April 2020, assuming monthly withdrawal increasing yearly at the rate of inflation 2%. This analysis is prepared by Endowus and is for informational purposes only. Endowus makes no claim to its accuracy. Investing in securities involves risk of loss. Past performance is no guarantee of future returns.

There is a misconception that by being "safer" the risk of running out of money is lower. This is not true.

Investing better is crucially important to living better. This means staying broadly globally diversified, at the right risk tolerance based on your goals and behaviour, and at a low cost.

Keep your "Wealth Chicken" healthy and producing those eggs!

What is your "Wealth Chicken" doing?

Next on the Endowus Fin.Lit Academy

Read the next article in the curriculum: The state of retirement in Singapore

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Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund. 

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.