Module 4D: Build a Confidence Interval from Outliving your Retirement Funds

In Module 4C, we have covered these points:

  1. Only increase your spending if your investment asset is growing. Else, keep your previous year expenses.
  2. Reduce to 3% spending of investment asset during bad times, when asset not growing.
  3. Reward yourself to 5% spending of investment asset during good times, during economic boom.
  4. You could spend more in your early years then reduce spending (forego inflation increases) in later years when you don’t need as much money
  5. You could spend more in the early years and reduce your spending if you are unfortunate enough to endure an adverse returns sequence in the first decade.
  6. You could start at 4% and increase spending if the first decade enjoy high investment returns with low inflation rate.

These are the mix-and-match variations on how to approach withdrawing money. The bottom line is, you don’t have to be a robot and mindlessly follow the inflation rate into eventual financial tragedy. Adjust spending based on actual results (growth or decline) of investment portfolio, not based on behaviour or conventional retirement model.

To rephrase the points above, the strategy employed now is annual withdrawal tagged to a fixed percentage of your principal (aka retirement asset balance). This virtually eliminates risk of failure but causes variability in income based on portfolio value fluctuations. As the retirement balance rises, you will withdraw more and as your assets fall you will withdraw less. Whether or not your spending keeps up with inflation would be determined by the growth of your assets.

Also, this simple relationship explains in just a few brief words why a man who needs RM 20k a year is rich when he has a million ringgit nest egg, while a man who spends RM 150k a year feels poor with a million ringgit – same portfolio but totally different experience.

Flexibility and rationality are the keys. This will alleviate the risk of running out of money.

One-size-fits-all is a static concept used in conventional retirement plan or calculator. They are naive and dangerous. Don’t buy into it, even sometimes it is conventional wisdom.



However, even these golden rules are not perfect, unless the things below are taken into consideration.

Transaction fees and commission

These fees may seem small or even negligible, but it is not. Imagine you have invested your portfolio with an adviser who charges 1% management fees based on your AUM (asset under management) while investing in unit trusts with 1-2% MER. Then, we have entry cost for unit trust to as high as 6_%.  Even stock purchase/selling needs transaction fees charged by your brokerage. Taking this altogether, that is a whole lot of annual investment expenses taken out from your 4% withdrawal rate. It is a serious thing to account for.

Does conventional retirement plan or calculator takes all these into account?

I think not.

By the end of the day, we would have wondered why your retirement funds are dwindling at an alarming rate when your investment annual reports shows spectacular return.

The only solution to this is to track the absolute investment expenses yourself. There is no easy way to this.

Longevity is an acute  financial problem

The longer your retirement pool has to last, the lower the percentage you can withdraw every year.

But this is a fact – people are living longer. When EPF was created, they set the retirement age at the average life expectancy in the 60’s or 70’s – around mid sixties. It was NEVER intended to fund 20+ years retirements.

Additionally, our current life expectancy is a moving target expected to increase by the time your date with death arrives.



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