Friday, June 30, 2017

My Drawdown Decumulation Plan in Early Retirement

We’ve been talking a lot in our community on the accumulation phase throughout our working life, either by choosing the right investment product or getting the right insurance protection but there is hardly a discussion on the decumulation phase. 

The two are linked because our life is finite in nature, thus there is a need to determine how much we need for the expenses and start working backwards how much we should be accumulating in the earlier phase of life. 

These plans will differ from each household to another, depending on the traction of how much you need, how long you live, how much you can earn and how much you are comfortable with. Goals and plans are also a moving target, so it is common that they will change from time to time, though unlikely to be drastic if you think through and plan properly. 

I’ll share about how I plan for my drawdown in the decumulation phase of my planned early retirement lifestyle. This is just based on what I think, so I leave the part off from my wife side where she'd be also able to contribute once her business takes off to the height she wants but for conservative purpose I've left that part out.




Least Scenario

• Assuming I stop my corporate lifestyle at the age of 35 and receives no active income thereafter
• Portfolio of $1M, with a yield of 6% - This would yield me a base of $60k per annum
• Aiming for a portfolio growth of 5% per annum on average
• Side Income Hustling yielding ~ SGD500 a month (or $6k a year). 
• Income to Expense Ratio at 1x, with inflation growth at 3%
• Partial withdrawal on capital from the age of 50 at 3%
• CPF payout from 65 onwards, which is minimal
• Life Expectancy until 90

Comments: The least likely scenario embedded the opportunity to get out of the rat race much earlier and live off the rest of the expenses through mainly dividend income. The portfolio will still be growing marginally while this method will probably embed partial withdrawal on the capital once we entered the second half of the retirement lifestyle. It is unlikely that there will be anything significant from what the CPF can support since our contribution will be very minimal so not much dependency will be hinged on this.

or 

• Assuming I stop my corporate lifestyle at the age of 35 and receives no active income thereafter
• Portfolio of $1M, with a yield of 6% - This would yield me a base of $60k per annum
• Aiming for a portfolio growth of 5% per annum on average
• Side Income Hustling yielding ~ SGD500 a month (or $6k a year). 
• Income to Expense Ratio at 2x, with inflation growth at 5%
• No Withdrawal on capital
• No dependency on CPF Payout
• Life Expectancy until 90
• Move to neighbouring retirement countries

Comments: The other alternatives is to move to a neighbouring countries and set up some side hustling business there. Expenses are low so the income to expense ratio should easily settle for the rest of our lives. There is also no expectancy on the withdrawal of the capital and any dependency on the social security retirement.

Base Scenario

• Assuming I stop my corporate lifestyle at the age of 37 and receives no active income thereafter. 
• Portfolio of $1.2M, with a yield of 6% - This would yield me a base of $72k per annum. 
• Aiming for a portfolio growth of 8% per annum on average. 
• Side Income Hustling yielding ~ SGD500 a month (or $6k a year). 
• Income to Expense Ratio at 1.2x, with inflation growth at 3%. 
• Partial withdrawal on capital from the age of 50% at 3%. 
• No dependency on CPF Payout. 
• Life Expectancy until 90. 

Comments: This is nothing much different from the above except I build my margin of safety through continue working for corporate while building the capital bigger. The incremental increase of $200k by working for the additional 2 years is just a random estimate figure which I rounded up from my head but if our dear bear market comes early, we might just reap the benefits much earlier. I think with an income to expense ratio at 1.2x, it also builds up savings during the month which can be ploughed back into the portfolio to compound further.

Best Scenario

• Assuming I stop my corporate lifestyle at the age of 40 and receives no active income thereafter. 
• Portfolio of $2M, with a yield of 6% - This would yield me a base of $120k per annum. 
• Aiming for a portfolio growth of 10% per annum on average. 
• Side Income Hustling yielding ~ SGD1000 a month (or $12k a year). 
• Income to Expense Ratio at 1.5x, with inflation growth at 3%. 
• No withdrawal on capital. 
• No dependency on CPF Payout. 
• Life Expectancy until 90. 

Comments: This is building up a larger safety net and will definitely score on getting retirement settled and out of the way for the rest of our lives. Again, the market will play a big role because the faster the bear market comes, the easier to compound the returns for future years since we are buying at cheaper valuation. I am also expecting some side hustling to pan through over the years and should contribute quite significantly to our income. We still have back-up plans from our capital withdrawal strategy and CPF which remains our fall back options should we need to.


Final Thoughts

This is just something which I have in my mind right now. 

There will definitely be changes in plans along the way and we'll play by it but we believe nothing should be as drastic. 

The fact also that when I stop working means there will be no contribution to the cpf, so that is something which has to be accounted for as well via the cashflow and included from it. The good thing about it there will also be no tax expense from my part so that should mitigate some of the losses.

Ideally, we prefer if we do not make any drastic changes to our lifestyle in the pursuit of this whole early financial independence thing but we'll have to see as we goes.

The big wildcard here will still be how my wife business will take off.

What do you think? Is this something which you think is sustainable?

Thanks for reading.

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9 comments:

  1. With drawdown strategy I think it is more sustainable during decumulation and retirement phase. Any unexpected large capital gains will extent the sustainability farther

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    Replies
    1. Hi Uncle CW

      If possible id rather kept that strategy intact as back up in case error in calculation.

      Delete
  2. very interesting topic. Some thoughts:
    1) expenditure is likely to be constant, but passive income through dividends is not. you might need a flow account to tide you through downturns.
    2) what will you do from 40 to 90? for me, that is my biggest concern with early retirement.

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    Replies
    1. Hi Dan

      On your first question,I believe that the dividend for that year might drop temporarily but good companies usually rebound higher since they are able to use the crisis as opportunity. As for those that are depending on dividend income, you might want to buffer for a bad year but in the long run the key is still to buy companies with sustainable dividend growth.

      On your second question, I cant say for others but for me Id have no problems because I have plenty of bucket lists that I want to be attempting so it should keep me a lot busy. I think for someone who works for the sake of working not knowing what else they could do with their time is a bit sad because there is a lot more than that to life.

      Delete
    2. Hi Brian,

      Thanks for replying. On point 1, even blue chip companies have downturns that last way longer than 1 year though (like Sembcorp). It is definitely possible not to buy them m, but you might be leaving yourself with a smaller margin for error as you cannot afford many wrong picks. Of course, your stock picking history suggest that confidence is probably not misplaced.

      On point 2, unfortunately my bucket list includes more work - specifically working for myself, which requires capital and a certain amount of risk taking. Maybe I should refine my bucket list, but I have the benefit of watching you go through this process first :)

      Definitely glued in!

      Delete
  3. im just wondering if lets say there a crisis happening now drop 50% can this dividend passive income still work? or we need to relook again at this thing again.

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    Replies
    1. Hi 123123

      The dividend for that year might drop temporarily but good companies usually rebound higher since they are able to use the crisis as opportunity. As for those that are depending on dividend income, you might want to buffer for a bad year but in the long run the key is still to buy companies with sustainable dividend growth.

      Delete
  4. I think its great that you're planning this out. Any thoughts on how your plans might do if there was a big inflation spike during your half century of retirement? Will you be invested in assets that should keep up?

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  5. I think its great that you're planning this out. Any thoughts on how your plans might do if there was a big inflation spike during your half century of retirement? Will you be invested in assets that should keep up?

    ReplyDelete

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