Why bother thinking about an optimal withdrawal strategy? Well, what’s the point in saving and investing if we’re not going to enjoy the fruits of our labour? Eventually, once we’ve accumulated enough in our retirement accounts to meet our FIRE number, we can pull the trigger and start living off of the income that can be withdrawn from our investments!
That’s when we have the FU money – no longer needing the income from our employment to sustain our lifestyle – we’ve become financially independent!
However, as Singapore residents, we will likely have our retirement moneys parked in multiple buckets – primarily inside CPF for CPF LIFE, the Supplementary Retirement Scheme (SRS) and our brokerage accounts – each with their own limitations and withdrawal requirements. Given the complexity, what is the best approach we should take in order to withdraw the funds from these accounts in the most optimal way?
Well, as my early retirement journey progresses, I’ve been thinking about this and I think I’ve cracked it.
In my typical fashion, I will be breaking down my thought process, how I approached the problem, and finally draw some conclusions on the optimal approach for me. Now my situation will not apply 100% to you, but hopefully you’ll find it useful in thinking about your own approach.
TL;DR a Summary of the Findings
Before we dive deeper, here are the TL;DR of my findings:
- It’s best to start CPF LIFE payout as soon as possible (age 65) rather than wait till 70.
- Withdrawing the funds from SRS directly is better than converting the funds to an annuity.
- It’s best to begin withdrawing the funds from SRS as soon as I reach retirement age rather than wait till a later date.
This result was a surprise to me and a bit counter-intuitive. How did I come to these conclusions? It’s time to dive in!
Starting with my retirement income
Let’s start at the very beginning – the amount of money I will need to stop working forever – my FIRE number.
Based on my “never-have-to-work-again” number, I estimated that I would be very comfortable with S$72,000 per year in passive income in order to retire forever.
Now this number also allows for inflation adjustment so I can increase the amount by inflation each year and still be fine. Let’s take a reasonable 2% inflation as a baseline here.
So if graphed out, from the date of my planned retirement at age 40, here’s what the amount of withdrawals would look like:
You’ll already notice that, even with a modest amount of inflation, the yearly withdrawal grew to almost S$250,000 per year by the time I turn 100 (hey, I’m an optimist!) This illustrates the importance of making sure our retirement money is invested to make sure it can beat inflation.
Pretty simple right? I’ll have to withdraw the above amounts each year in order to maintain the life-style I want during my FIRE years. If my retirement portfolio cannot sustain this and run out before I die, I’ll be living on the street or have a much reduced quality of life.
So I just have to make sure that whatever buckets of investments that makes up my portfolio can maintain this level out income.
Of course, this would be extremely straightforward if all of our retirement money was sitting in one place. If we only have our brokerage accounts to worry about, we’d just have to sell our investments in the portfolio gradually to generate the passive income.
However, as mentioned at the top, we have more buckets of retirement funds that that.
As Singaporeans and Singapore PR, when we turn 55, the amounts in our CPF Special Account (SA) and Ordinary Account (OA) will be converted into a Retirement Account (RA) up to the Basic Retirement Sum (BRS), Full Retirement Sum (FRS), or Enhanced Retirement Sum (ERS.)
This retirement sum can be converted into an annuity which will provide CPF members with a regular monthly payment once the CPF member reaches the age of 65. This monthly payment will last until we pass on and thus provides a hedge against longevity risk. This is the CPF LIFE Scheme.
For more of my thoughts on the CPF LIFE Scheme, you can check out my post on the optimal approach to CPF LIFE.
Select the payout starting age – which is the best?
However, as CPF members, we have a choice on when to start the CPF LIFE payment. We are allowed to choose between starting the payout starting from age 65 up until age 70 – the longer you delay, the higher the monthly payout will be (up to 7% more, according to the CPF website.)
At the time of writing, the current payout of the FRS in a Standard Plan (which is my recommended choice) pays out between S$1,350 per month (S$16,200 per year) at age 65 or up to S$1,450 per month (S$17,200 per year) at age 70.
That’s the payout if I retired today. However, I am currently only 34 so I’ll assume that the payout at the time I turn 65 and 70 will have been adjusted for inflation (assuming 2% inflation.) Once adjusted for inflation, the annual CPF LIFE payout above becomes:
Start at 65: S$29,930 per year
Start at 70: S$35,494 per year
When graphed out, this is what the withdrawal will look like if we start the CPF LIFE payout at 65:
Here’s the one for starting at age 70:
As you can see, the CPF LIFE Standard Plan does not increase with inflation so as the withdrawal amount increases, the amount that’s replaced by the CPF LIFE payout remains the same, and we end up withdrawing more and more from our investment portfolio anyway.
So looking at this, how do we tell which option is better? Well let’s step through the way I used to figure this out.
What is the impact of portfolio withdrawal without CPF LIFE?
So let’s assume a 4% Safe Withdrawal Rate and if I started withdrawing from my portfolio at age 40 where S$72,000 is exactly 4% of my portfolio, I would have started with S$1,800,000 in my portfolio.
However, since the withdrawal amounts gets adjusted for inflation (at 2% per year) and the investment portfolio grows – let’s assume a conservative 6% portfolio growth per year – the rate of withdrawal will continue to change.
Here’s a chart of the withdrawal rate if CPF LIFE does not exist:
Here’s what the Portfolio Value will look like over time:
You can see that as the withdrawal rate increases, the portfolio value growth slows as more money is withdrawn than it makes up for in portfolio growth. Eventually once the withdrawal rate gets high enough, the growth rate of the portfolio simply cannot keep up with the withdrawals and the portfolio starts plummeting quickly and trends towards zero.
The great news is that CPF LIFE will help to supplement our income so once our CPF LIFE payout starts, it will reduce our withdrawal rate from the portfolio.
Impact of CPF LIFE payout on portfolio withdrawal rate
So let’s graph out how CPF LIFE payout at different age impacts the portfolio withdrawal rate over time:
Pretty neat! You’ll notice that once the CPF LIFE payout starts, the withdrawal rate drops immediately since my income is no longer made up of just the withdrawal from my portfolio since I now have CPF LIFE payout. I can afford to withdraw less from my portfolio, reducing my withdrawal rate.
Also, what’s that at the right side of the chart? It looks like the withdrawal rate for CPF LIFE payout starting at 65 is dipping lower faster than if waited to start my CPF LIFE payout at 70!
Even though the payout amount is higher if I start at 70, it looks like the impact of reducing my withdrawal rate earlier is much more impactful than the increase payout amount later.
Let’s confirm this by looking at the difference in the portfolio value for the 3 options:
Fascinating! The portfolio value confirms our above points. Starting the CPF LIFE payout earlier allows us to reduce the amount withdrawn from the portfolio, giving it more time to grow and thus compound.
It looks like the CPF LIFE payout perspective, start the payout as soon as we are able to – our portfolio will thank us.
Now that’s settled, let’s take a look at our second retirement bucket, the SRS Account.
The purpose of the Supplementary Retirement Scheme (SRS) is to incentivise those living in Singapore (Citizens, SPRs as well as foreigners) to plan and save more for retirement. This is the Singapore government’s way of getting their residents to plan better for their own retirement – in addition to having CPF.
Unlike CPF, contributions to the SRS Account is completely voluntary and is available to foreigners living in Singapore.
All funds (up to a yearly cap) that is contributed to the SRS Account is exempted from tax and thus reduces the amount of taxable income a person has. The more you earn, the more sense it makes to contribute to the SRS Account.
SRS funds can be used to invest in SGX-listed investment vehicles and also life annuities so that they can grow tax-free until the funds are withdrawn.
Although early withdrawal is permitted (with a 5% early withdrawal penalty) it’s best to wait until the statutory retirement age (62 in my case) to withdraw when the early withdrawal fees no longer applies and only 50% of the withdrawn funds are taxable – a huge boon.
Once the funds begin to be withdrawn after the statutory retirement age, a 10 year countdown clock will start. Fifty percent of any funds within the SRS Account after the 10 year period will be taxable at the prevailing income tax rate.
Since I am a CPF member, my SRS funds will eventually help provide me with additional source of income in my retirement on top of my CPF LIFE payout.
For more information on how to use the SRS, you can refer to my post on how to make use of SRS to legally avoid paying income tax.
The choices we face on withdrawing from SRS account
As SRS account holders we actually have 2 different choices to make:
- Should we withdraw the funds directly or use the funds to buy an annuity so we can generate a steady stream of income?
- When do we start doing the withdrawal – start immediately at 62 or wait till later.
Let’s start with the direct withdrawal
If we just withdraw the funds directly from the SRS account, we have a 10 year limit to withdraw the funds where only 50% of the withdrawn funds are exempted from tax. Once that 10 year window is over, 50% of whatever remaining funds within the SRS account will be subjected to income tax.
This incentivises us to spread the withdrawal out as evenly as possible (you can read on the optimal withdrawal approach on my post on optimising income tax with SRS.) Using the withdrawal approach, and assuming that the SRS funds are invested and grows at 5% per year, here’s what a chart of the withdrawal will look like:
As you can see, as the SRS funds grow year-on-year, the amount of withdrawal each year increases slightly, which is great since that also helps offset inflation somewhat. Then after the 11th year, the funds in SRS are exhausted so at age 73, we will have to rely on the brokerage account outside of SRS again.
Now, to contrast this with the annuity
An annuity is a financial instrument that is often sold by insurance companies that allow you to convert a large lump sum of money into a steady stream of constant income.
Payout Length: Depending on the kind of annuity we purchase, the payout could be until death or limited to a certain number of years. My recommendation is if we are going to consider annuity at all, we should only look at ones that payout until death.
Payout Amount: Depending on our choice of annuity, we can often choose whether we want a fixed payout or a payout that increases over time to attempt to account for inflation. If we purchase ones that increases over time, the payout amount will start lower. Fair is fair.
Payout as Percentage of Purchase Price: From what I have seen in Singapore, immediate annuities (annuities that start immediately after purchase), tend to have a “guaranteed” payout around 5% of their purchase price per year with another “non-guaranteed” portion based on the performance of their participating fund. We don’t want to account for the non-guaranteed portion here.
Basically the annuity option allows us to convert our SRS funds into something similar to CPF LIFE.
One benefit of getting an annuity is to lock in a steady income and also remove the 10 year limit on the SRS withdrawal. Fifty percent of any payouts from annuity purchased with SRS will continue to be exempted from income tax even after the 10 year limit.
Let’s assume that the annuity will pay out 5% of what we used to purchase it until we die and the amount in my SRS account by the time I turn 62 is about S$418,240, here’s what the annuity will look like:
Since we picked a fixed annuity, the payout does not adjust with inflation (similar to CPF LIFE).
You can already see that this gives us a lower amount but for a longer period compared to the direct withdrawal.
So how do we make comparison between these two options? Which is better?
Looking at the effects on withdrawal rate and portfolio balance again
Similar to how we broke it down for the CPF LIFE options, let’s take a look at the effects each option has on the withdrawal rate from our portfolio.
Here are what the withdrawal rate looks like for both options over time:
Hmm, the withdrawal rate for the SRS annuity seems to be increasing at a much faster rate than that of the direct SRS withdrawal. Given that the withdrawal amounts are the same between the 2 options, this should mean that the portfolio value for the SRS annuity option has dropped much more quickly than the direct SRS withdrawal.
Let’s take a look at that:
As we expected, the portfolio value of the SRS annuity option drops sharply compared to just simply withdrawing directly from the SRS.
This makes sense since all S$418,240 is withdrawn from the portfolio all at once to be converted to an annuity. Although the amount we need to draw from the portfolio reduced due to the annuity income (causing a small drop in the withdrawal rate at 62), the large drop in portfolio value means that the portfolio cannot grow fast enough after that to compensate for the value lost.
It’s very clear that instead of depleting the entire SRS amount to purchase an annuity, it’s better to keep the money invested in the SRS and withdraw the funds directly over 10 years instead of trying to convert it into a fixed income with annuity.
Now let’s discuss the timing
Since we already determined that doing a direct withdrawal is better than converting the funds into an annuity (since it destroys portfolio value quickly) one last question remains. Should we withdraw the funds immediately starting at the statutory retirement age at 62 or wait until later?
Now, with regards to the age of withdrawal for SRS, although the minimum age is the statutory retirement age, there is no maximum age. It’s possible for us to simply keep the money inside SRS and never withdraw it until we die, at that point the money that remains in the SRS will be taxed (based on a complex rule that we won’t get into here) before it gets passed on to your estate.
However, we’d like to enjoy the fruits of our own savings in our retirement so, for the upper bound, I will use the withdrawal age of 70 in this comparison to coincide with the upper bound on starting the CPF LIFE payout.
Here’s what waiting till 70 to withdraw from the SRS looks like:
Because we start withdrawing the funds later, the SRS funds have the opportunity to grow for 8 years longer and thus our yearly withdrawal can be higher.
Keep in mind that the SRS funds are invested in STI ETF with a conservative growth rate of 5% whereas the rest of the portfolio is invested in a Bogleheads 3-Funds Portfolio with a conservative growth rate of 6% – I expect this is super conservative as historically the Bogleheads portfolio has returned more than 8% on average, but let’s take this conservative approach for now.
With that out of the way, it will explain the following results of the withdrawal rate and portfolio value between the 2 timing options:
Based on the above graphs, it’s clear that the SRS Withdrawal starting at 62 is a clear winner over starting the withdrawal at 70 – all else being equal.
The main reason for the result is the difference in growth rate between the SRS funds vs the funds outside of SRS.
Since the funds in the SRS account is invested in the STI ETF, the rate of returns in that account is a lower 5% compared to the 6% of the bogleheads portfolio of the brokerage account. By withdrawing the SRS funds earlier, a larger part of the annual expense is funded by a lower return SRS funds leaving more of the higher return brokerage account to compound. If we wait to withdraw the SRS funds till 70 years old, a larger portion of the higher returns brokerage account is being used to fund our annual expenses leaving less to compound at the higher return.
This results in a lower portfolio value – and thus higher withdrawal rate – by waiting to withdraw.
The rule of thumb here is to start making use of the lower returns portion of your asset to fund your expenses first and leave the higher returns asset to grow.
The conclusion from comparing the timing is to start using the SRS funds as early as possible, in my case this is at the age of 62.
Pulling it all together, combining the analysis
Now that we know that the optimal withdrawal strategy is to:
- Starting CPF LIFE payout as early as we can.
- Choose to withdraw the SRS funds directly instead of purchasing an annuity with it.
- Withdraw the SRS funds as early as possible rather than waiting for a later date.
Let’s see that once we combine the strategies that this gives us the best result.
I will be comparing 2 different options to provide a comparison. The best way we can do this is to choose 2 opposite option: a best case and a worst case.
|Best Case||Worst Case|
|Start withdrawal of SRS at 62 and start CPF LIFE payout at 65||Purchase annuity using SRS at 70 and CPF LIFE payout at 70|
Here is what the Best Case withdrawal graph looks like:
And here’s the worst case graph:
You can see that there’s a huge drop in the amount of funds that is needed from the portfolio between the age of 62 to the age of 73 in the best case scenario, whereas in the worst scenario the reduction comes later at 70.
Let’s see the effect this has on the withdrawal rate for both:
As you can see, with the Best Case – SRS Withdrawal at 62 and CPF LIFE at 65 – there is a significant drop in the withdrawal rate much earlier than the Worst Case scenario.
After that the withdrawal rate remains lower than the Worst Case for a few years and increases at a slower rate. Once the Worst Case annuity and CPF LIFE kicks in at 70, it’s true that the withdrawal rate drops sharply – even to a lower level than the Best Case – but it begins increasing again and at a faster rate than the Best Case.
Let’s take a look at how this affects the total portfolio balance:
Here the story is quite clear, at the age of 62-65 the Best Case scenario shows a change in the rate in which the portfolio grows – the growth rate increases because we’re using the funds from SRS and CPF LIFE to support most of our annual spending and letting the funds in the brokerage account grow at a faster rate.
Compare that to the worst case, when the SRS funds convert to an annuity at age 70 it causes a large drop in the total portfolio value. After that point, there was no way that the worst case option would ever catch up to the best case.
Phew that was another long analysis. I hope that you found it interesting and useful. It certainly helped me organise my thoughts around how I can withdraw from my retirement accounts.
Let me know if you have any questions or feedback on this post by commenting down below. If you found this post useful, I’d really appreciate it if you help share it with your friends.
Until next time!