Wednesday, August 12, 2020

[Die with Zero] Peak Net Worth and Decumulation with CPF Life

 99% Peak of Coronavirus on 22 Feb 2020 (World vs SG) with SWOT ...

One uncomfortable idea shared by Die with Zero is the idea that if we really believe in consumption smoothing, we would have to entertain the idea that a certain period of our life, we would hit our peak net worth. It means decreasing net-worth thereafter. 

The reasoning is actually quite sound - at an older age, we will not need so much money anymore. We should also take the time to enjoy what we have already earned. 

The year by which we attain peak net worth, however, is subjective. Any time in your 40s is fine but I think that in Singapore, the peak should not arrive earlier than 55 when you can extract your CPF money. It is also affected by the age by which your kids start being able to hold down a job and fend for themselves. 

The second aspect of peak net worth is that we need to now find the way to decumulate our wealth or to spend a proportion of it every year until we end up with a net worth of $0 on our last day on earth.

At this point, I will try to solve the problem for a Singaporean at the boundary conditions. 

The solution at the end of life is not that hard - we know that CPF Life can be deferred until 70.  To make decumulation possible, it is best to have the maximum amount possible in your CPF-RA pegged to an escalating plan and deferring payment for the longest time. I entered my age into the CPF calculator and using the Escalating Plan, setting the amount to $271,000, I should be able to extract a minimum of $2,147 from CPF Life. This even escalates to keep pace with inflation. 

So we've solved the Die with Zero problem by getting enough annuities to support us after age 70. Anyway, at age 70, you would not be going anywhere so more money beyond $2,100 might even be pointless.

Now we have a guarantee of monthly payouts to start providing income support from age 70, all that is left to do is to decumulate until age 70. Simply ear-mark a percentage of your liquid net-worth to be spent in the upcoming year. 

Suppose you are now 55 years old. You will have 15 years until you are 70 years old. You can spend 1/15 of your net-worth or 6.66% plus your income that year. If you have $2,000,000 and earned $100,000 that year, you need to spend $233,333 to decumulate by year-end. The idea is that excess unspent wealth can be gifted to your children so that they will not need to wait for you to die to have money to spend. At age 56, you can spend 1/14 of your liquid net worth.

I think the difficult part of this mental exercise would be to accept that after a certain point in your life, your net worth will start dropping moving forward. 

It is unthinkable for me. 

But there is wisdom not holding onto your wealth and giving it to your children instead while they are in their career forming years. As they are young, they can bring a certain dynamism and energy into portfolio management. 

If the money is kept with older folks it would be too tempting to keep it rotting in bonds investments all day. 




  1. Hi Chris, I like the concept of "wealth parity" which I came across sometime back from a Sunday Times article. Basically the wealthy parity concept said that people should aim to distribute their wealth among their immediate family members early rather than wait till their demise. One of the stated rationale was that should anything untoward happens to the benefactor, the family members would be already financially prepared and not have to wait for the legal processes to be sorted out for the money to be disbursed. Plus avoiding potential conflicts between family members over the wealth distribution when the benefactor was no longer around to make things clear.

    You have added another benefit to distributing the wealth early and that is that the family members being younger, would be in a better position to grow the money.

    You have also nailed it when you mentioned that it would be difficult to accept that our networth would start de-accumulating at some point in our lives. I thought the answer to avoid this predicament was to achieve Financial Indepence (FI).

    I believe (I could be wrong here) the original intent of the FIRE movement was to establish passive incomes that cover the annual expenses such that people can stop active work without having to go through de-accumulating phase. But as I read more and more blogs, I gathered there are various interpretation of FI. Some bloggers interpreted FI to mean that they have accumulated enough savings to last them till their last day through de-accumulation. Others intrepreted FI as having enough passive income combined with de-accumulation to last till their last day.

    I think, in the US, the real FIRE gurus aim to depend entirely on their passive incomes without having to de-accumulate throughout their lives. JL Collins and Mr FIREStation are two examples.

    In the local context, I thought Loo Cheng Chuan's CPF 4M65 concept has a good chance of minimising the de-accumulating phase.

    I only got to know of the 1M65 concept when I was already past 55 yo. But through my calculations, I found that the concept was quite workable.

    If young couples and even singles diligently sock money into their CPF and transfer money into the higher interest earning accounts, they could seriously grow their CPF savings, with substantial portions of it derived from the interests! For eg., if a couple do achieve $4M in their combined accounts at 65, $1M of that money is from the accrued interests!

    At $4M, the couple can extract $120,000 yearly from the CPF through a combination of interest from OA&SA and the payout from their RA / CPF Life. If their lifestyle is say, $7,000 per month or $84,000 annually, they could literally let the CPF grow even as they enjoy their retirement.

    At this late stage, I am playing catch up here and even then, I am seeing some early "results".

  2. Thanks for your contribution.

    It is never too late to catch up !