Thursday, October 18, 2018

Early Retirement Scenarios

Thanks to the efforts of BIGS contributor and venture capitalist Lim Der Shing, we now have a decent simulation tool to track what happens when we start drawing out money for retirement. A link to the academic paper and tool can be found here.

I'm going to share two retirement scenarios and discuss the implications of using such a tool to determine the target withdrawal rate and subsequently the portfolio size to support this retirement lifestyle.

Before getting into the scenarios, I just want to highlight a possible controversy to the use of this spreadsheet.

I use the real rate of return of an equity portfolio to be 7.4% which is considered abnormally high for Singapore markets. This is because I derive long term equity real returns as the inverse of the current Shiller PE ratio for Singapore markets (currently 13.5) taken from the link here. Contrary to our collective experience, Singapore markets are cheap and notwithstanding the trade war, we are in a much better shape than Malaysia that has a higher CAPE of 16.6. Therefore, there is no better time than now to have a nice retirement portfolio built on a mixture of Singapore stocks and REITs.

If you are not comfortable with my numbers, simply give yourself a healthy 100% margin of safety from my simulation figures. Retiring based on a bigger margin of safety remains within the reach.

( Note that I also put the real rate of returns for bond is 0.9%. )

Scenario 1 : The BBFA ( Bui Bui Forever Alone ) FIRE retiree

Suppose you are single male, in your 40s and are quite sick of corporate world. You live with your parents and want to spend the rest of your life playing computer games and don't want anything to do with love or marriage.

What considerations would you need to retire ?

  • You can assume that you will live to age 90. So your money must last at least 50 years.
  • You are willing to spend capital such that your net worth when you die at age 90 is about 50% of your net worth today. ( You have no dependents )
Cranking the numbers on the spreadsheet, to be successful 95% of the time, your safe rate of withdrawal peaks at 4.17%. It also advises the use of a 100% equity portfolio. 

Suppose your monthly expenses is set at around $1,500 or $18,000 annually. The amount needed to retire is $18,000 / 4.17% or $432,000. 

Scenario 1 establishes the most austere form of retirement involving a single male in his 40s who lives with parents and plays computer games all day. The simulation suggests that $432,000 is enough to successfully last 50 years with a 95% probability of success. At the end of his life, he still has around 50% of what he started with which would adequately cover the event that he lives longer than projected.

Scenario 2 : The ordinary retiree

A more realistic scenario was co-created with one of my students who invited me for lunch after class. He had a much more realistic approach to retirement.

Suppose you are a married male, in your 60s and want a portfolio to augment your retirement lifestyle. Your children are already independent and working. Your spouse had her own career and she will mirror your financial strategy.

What considerations would you need to retire ?

  • You can also assume that you will live to age 90. So your money must last at least 30 years.
  • You are willing to spend capital such that your net worth when you die at age 90 is about 80% of your net worth today. This is because you want to leave a sum of money to your children after you die.
Cranking the numbers, to be successful 95% of the time, your safe rate of withdrawal peaks at 3.85%. It also advises the use of a 100% equity portfolio. 

At this stage, this retiree has already secured a cash flow of $1,000 a month from CPF life. He expects his expenses to be around $2,000 in total (I project retiree household expenses to be around $2,100 in 2018). Dividing $12,000 / 3.85%, we get a portfolio size of around $312,000. 

Scenario 2 takes into account the benefits of having a lifetime annuity like CPF Life so this drastically reduces the required portfolio size of a retiree. 


First off, in both cases a 4% withdrawal rate used as a rule of thumb is considered quite acceptable. For extreme FIRE practitioners who want to get out of the rate race in your 30-40s, I recommend using 3% instead since you may be retiring with young children in tow. 

There are quite a few interesting observations here. 

In all cases, having 100% in equities results in the highest withdrawal rates. A reasonable retirement portfolio for a couple in their early 50s is also very much possible at around $1,000,000. Of course, you must accept that you have already fully paid your home mortgage, kids are doing fine, you live a simple HDB heartlander lifestyle and your children have no desire to take over your entire portfolio after you die. 

In both of these examples, I omitted the possibility of higher returns by the intelligent application of factor investing, where a balanced portfolio of equities and REITs can be boosted to around 14% returns. I have also omitted the use of leverage which may be dangerous for the retiree but may accelerate the process of attaining the right retirement portfolio size.  

( I'm still doing some R&D to see if the simulation spreadsheet accepts negative numbers )



  1. The big spanner in the works is always sequence of returns risk.

    E.g. if one were to retire on 31 Dec 1999 and do the drawdown from 2000-2003...

    At the end of 2003, inputting the remaining market value of portfolio into the spreadsheet ... would it still show 95% success at the same rate of withdrawal?

    GFC was actually a "good" bear market in that the crash & subsequent 62% retracement recovery occurred in a very short time.

    Central banks may not have luxury or political will for wanton debt enlargement (i.e. QE) in the next global recession, and it may play out in a protracted manner like in the early 2000s or early 1970s.

  2. Using portfolio visualizer's monte carlo function, a portfolio of global stocks 50% US and 50% global ex-US, at initial 4% withdrawal adjusted for inflation:

    (i) 88.8% success rate over 30 years.

    (ii) 80.6% success rate over 50 years.

    However if stress test with, say, worst first 2 years, then the success rate drops drastically:
    (iii) 42.2% success rate over 30 years.

    (iv) 35.8% success rate over 50 years.

  3. Thanks, you gave me a lot to think about !