What is a safe withdrawal rate from CPF LIFE, Rental Property Income and Dividend Stocks. Reader Question

Advertisement: Click here to learn how to Generate Art From Text

Da Nian chu Er is our Lunar Chinese new year.

Here’s wishing you all good fortune and health. I hope all our portfolios don’t go to zero.

I want to take it easy this Chinese New year. I have received a question by a sincere member of the Singapore Financial Independence Community. (If you wish to join, you can join our Telegram group. can join here.)

The person asks:

Please, at the risk of sounding stupid answer a query that has been bugging me for a while.

The good old Singapore Investment Strategy of:

  1. CPF LIFE payout of $5,000 per month for a couple
  2. Rental property estimated at $4,000 per month
  3. Estimated $3,000-$5,000 monthly dividend/interest/short term work.

How would you integrate the concept of Safe Withdrawal Rat (SWR) into the above framework?

I couldn’t see how it would fit in.

I understand that the numbers 2 and 3 above can fluctuate. It will only happen in extreme situations that it will reach zero, which is present in all market-based Portfolio.

I called the safe withdraw rate or SWR, a framework for figuring out the highest possible income for a given period of income, for an equity and fixed income portfolio that is low-cost, diversified and strategic.

Some people may be confused about how to calculate SWR if you are a pensioner, a property owner or a dividend investor.

Let me see if you can answer that.

Frame each income in terms of a specific income.

He gives three sources of income, and each has its own characteristics which makes it difficult to group together.

The dividend portfolio won’t have tenant vacancy to contend with. If the income is not enough to meet your needs, you cannot sell a brick.

It is best to determine for each income how much income can be had in a conservative fashion (we will go into this in greater detail in the other parts of this post).

You may wish to adjust all of your income for inflation so that his income stream looks like this:

  1. CPF: $5,000 x 65% = $3250 CPF LIFE (read My articlePlan to adjust your CPF LIFE Income for inflation
  2. Rental Property: $4,000 x 70% = $2,800 monthly
  3. Dividend Stocks: $3,000, based on a lower dividend yield for planning.

Since all three sources have taken into account income volatility and inflation planning, this comes to $9.050 per month.

Is this adequate for your family’s spending needs?

If you answered “yes”, then you should read this.

The essence of the Safe Withdrawal Ratio Framework

Many don’t understand why I am so focused on the SWR. If you admit that planning your income and ensuring it lasts a long time is a difficult problem, would you like to learn what is crucial to making strategies work effectively?

If we want the most important stuff to make or break a plan, we should focus on the relationship between the starting income/spending requirement and the value the portfolio.

If you spend too much relative to your portfolio at the beginning of the income, and then face a bad market + inflation sequence, it is possible that your plan will not work.

And you don’t have the opportunity to press the “Play Again” button.

The SWR is trying to make a point:

  1. You can live many different 30-year, 60-year or 40-year periods.
  2. Each of these periods has its own unique sequences for the markets and inflation. These are shown in the lines above.
  3. You can never go back and relive such a long time in your own life.
  4. It is impossible to know what will happen in the future.
  5. The SWR makes sure that the income plan for those who are the least fortunate works.

If you understand what you have read above, you might be wondering:

  1. Will my CPF LIFE show a bunch like the above or will there be no lines because there is no volatility in the income?
  2. Will my income strategy from rental property have a lot lines?
  3. Will my dividend income have a lot of lines?

The conservative answer is YES.

If so, how can you make a plan to ensure that even if your plan fails, you still get the desired results?

Rich People Don’t Explain What Makes Their Plan Work Well

Many people explain their plan as being sound.

They may say that they own a bunch properties that generate income and this is an excellent plan. Or they may say that they purchase blue chip stocks or REITs, which generates a steady income stream.

The reason their plan worked is that the ratio of their income/spending need to their portfolio value was very low. In the event of bad luck, this ratio is low.

If you have a portfolio of dunno what worth $20 mil and you invest $100,000 annually, that’s 0.5% of the original portfolio value.

Let’s say you are too gung-ho in your investments and it resulted in the portfolio being down 50% or $10 million. Let’s say you underestimate what you need to spend on, and your spending is $150,000 yearly.

$150,000/$10,000,000 = 1.5%

If Kyith told you that a 2% SWR initial is very conservative, you should have a good understanding of how safe it is to use 1.5%.

The rich are at peace because they have a plan “accidentally”Plan your income in a way that is effective.

Most underestimate the luckiest and unluckiest situations their income plan may be subject to

What surprises me the most is what most people expect.

  1. The chart above shows the number of lines that should be reduced.
  2. The sequence of events that they have experienced or seen in their investment life (5 years? 20 years?)

I don’t agree with your idea of what could be the worst.

You may have a strategy that is different, such as investing in dividends and property rental. However, you are still investing risk assets, and this can translate into volatility.

I don’t have the data but we can describe some events.

The chart below shows the monthly rental for a home. Kovan MelodyThe station is located next to the Kovan MRT.

Imagine a retired person whose income is solely from this unit. He retired in 2012 and received a gross rental of $4,600 per month.

How much does he expect his rental income to fluctuate? How well does he think his rental income keep pace with inflation? What will the inflation be in the future ten years?

He cannot predict many things.

Now, he could set up his plan to be conservative. He might estimate that his monthly spending of $3800 (assume costs are not included here) is less than the $4600 monthly. This plan is conservative.

Rent fell to $3.100, or 48% less, at some point.

Although inflation is low, prices are rising.

How will his plan turn out?

If he survives until today, his rent will increase to $5,400 per month.

But you look at the experience above and you can’t deny the volatility.

Now you know the scary thing. We are not talking more challenging scenarios.

The SWR takes us through the first world war, Spanish Pandemic, Oil Embargo, Great Depression and see how it performs in those situations.

The older folks who been through the Asian Financial Crisis will tell of the situation where banks really foreclose your property, even if you want to rent out, people don’t have the money to rent.

Would the rent of $5,400 per month in the Kovan Melody case be $2,200?

It may seem impossible to some, but you could be lucky if you can secure a tenant who has the money to pay rent.

Ben Carlson has this chart of the S&P 500 rolling 12 Month Dividend Growth from 1950 to 2023 in his article Can You Live on Dividends From Your Portfolio?:

Here is the dividend drawdown:

Here are the income drawdowns from a 500-stock portfolio.

I’m not sure what you do with your dividend portfolio.

But I’m quite sure that your total income is a certain sum. This amount will be VOLATILE.

The question is:

  1. How large can the drawdowns? These data may help you plan.
  2. How does your dividend strategy compare to the one above?
  3. How can I create a strategy to generate income from an investment that I am very fond of?

You’ll Need to Find a Way to “Feel”How wide the berth is in your investment?

Meb Faber shows this chart of the real returns for different US assets in his portfolio. Stay Rich Portfolio Article:

To be honest, the amount of cash I had under my mattress and in Treasury bills was shocking. How could this be possible?

You may not even be aware that there are some challenging inflation sequences.

This is the challenge you face in developing your strategy.

How bad can it be?

I don’t have the answers to everything.

What I wrote there is relevant to this:

  1. CPFCPF LIFE: $5,000 x 65 = $3250 My articlePlan to adjust your CPF LIFE Income for inflation
  2. Rental Property: $4,000 x 70% = $2,800 monthly
  3. Dividend Stocks: $3,000, based on a lower dividend yield for planning.

Why do I use 65% of CPF LIFE?

I am planning to wrap CPF LIFE around a 30-year strategy for inflation income.

Why 70% of your current property income? I don’t know but using 70% leans towards being more conservative than just plan assuming your future income from property will only go up.

If your average dividend yield is 4%, what should you plan to do?

I really have no idea.

How much will the total dividend be reduced if a Great Depression strikes Singapore? I don’t know.

I think a 30% dividend cut is reasonable.

So 4% x 70% = 2.8%. (See… in terms of capital needs, it always work out to be this 2-3% range. We can discuss a variety of strategies, but when it comes to a conservative income strategy, this small range is usually the best.

The degree of flexibility in your lifestyle

We can say a great deal about investing, but for many, the unknown is their lifestyle.

Many people who plan believed they had mastered this skill.

The amount they spend today is fixed.

They also have a lot of flexibility in how they can adapt to income challenges.

I often question this, especially when I hear others comment. “Kyith you spend so little!”It sounds more like “While I say I can be flexible, there is no way of cutting down my family’s lifestyle to your level.”

How much could you reduce?

Not a question for me but for yourself.

You might need to know this for your own planning.

I spent time figuring out mine and realize I don’t really wish to cut down on a few stuff. You need to decide if your flexibility is real or fake.


If you wish to trade these stocks, you can do so by opening an account at Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you trade stocks, options, futures forex, bonds and funds globally from a single integrated trading account.

You can read my thoughts on Interactive Brokers here.This Interactive Brokers Deep Dive Series is a series of articles that will help you learn more about the Interactive Brokers platform. starting with how to create & fund your Interactive Brokers account easily.

Kyith




‘ Credit:
Original content by Investmentmoats.com: “What is the safe withdrawal rate for CPF LIFE? Income from rental property and dividend stocks? Reader Question

Read the full article here https://investmentmoats.com/financial-independence/safe-withdrawal-rate-cpf-life-income-rental-property-dividend-stocks/

Leave a Reply

Your email address will not be published. Required fields are marked *

Proudly powered by WordPress | Theme: Funky Blog by Crimson Themes.