How to make your million-dollar retirement fund last

IMAGINE this: After decades of saving and investing, you’ve hit a milestone – S$1 million in your investment portfolio. Congratulations. You’ve done what most people only dream about.

But here’s the thing: the moment you stop working, a clock starts ticking. Every dollar you withdraw is a dollar that’s no longer compounding for you.

Take out too much, too fast, and you could outlive your money. Take out too little, and you’ll be penny-pinching through what should be your best years.

So how much can you safely spend each year? It’s the million-dollar question, literally.

Hidden danger of averages

For the longest time, financial advisers had a simple answer: take the average historical return of your portfolio, subtract inflation, and withdraw the difference. It sounds reasonable.

After all, the S&P 500 has delivered an average annual return of around 10 per cent since 1928. But here’s the problem with averages.

According to Charlie Bilello of Creative Planning, only 4 per cent of those years produced a return within 2 per cent of that 10 per cent average. In other words, the “average” return almost never shows up.

In 1994, a financial planner named William Bengen decided to stop relying on averages altogether. Instead, he asked a different question: Across every retirement period since 1926, what is the most a retiree could have withdrawn, adjusted for inflation each year, without running out of money?

He didn’t plan for the best case or average case; he planned for the worst.

How the 4 per cent rule works

Bengen found that if you withdrew 4 per cent of your portfolio in the first year of retirement, then adjusted that dollar amount for inflation each year, your money would last at least 30 years – no matter when you retired.

Say you retire with S$1 million.

• Year 1: You withdraw 4 per cent, or S$40,000.
• Year 2: If inflation is 3 per cent, you withdraw S$41,200 – last year’s amount adjusted upward.
• Year 3: At the same inflation rate, your withdrawal rises to S$42,436.

Notice something important: you’re not recalculating 4 per cent of your portfolio each year. You’re adjusting last year’s dollar amount for inflation. This ensures your purchasing power stays consistent, giving you a stable standard of living throughout retirement.

The 30-year assumption – what it takes

Bengen’s 4 per cent rule comes with a specific assumption that your portfolio should last at least 30 years. Here’s where it gets interesting for Singaporeans.

The average life expectancy after age 65 in Singapore is 19.5 years for males and 22.7 years for females, based on the latest available data. Therefore, a 30-year horizon provides a buffer of roughly seven to 10 years beyond the average.

That’s a comfortable margin of safety. But the promise rests on two assumptions worth knowing.

First, the portfolio was invested in a mix of 50 per cent stocks and 50 per cent intermediate-term government bonds, rebalanced regularly. Here’s the kicker: It requires you to stay invested through good times and bad.

Second, the study was based on US historical data going all the way back to 1926. It captures the Great Depression, World War II, the stagflation of the 1970s and every market panic in between.

Singapore’s stock market history is considerably shorter. The Straits Times Index has returned around 10 per cent annually over the past decade, but stretch that window to April 2002, and the average drops closer to 8 per cent.

With a smaller dataset and a different return profile, the 4 per cent rule may not translate perfectly to our local market. Still, the underlying principle still holds: plan for the worst, not the average.

The worst case: not what you’d expect

You’d think the Great Depression would be the retirement killer. Stocks plunged over 60 per cent between 1929 and 1931. Surprisingly, it wasn’t the worst period for retirees.

The early Depression was deflationary. Prices fell, which meant a retiree’s purchasing power actually held up better than expected. Bonds also posted modestly positive returns, cushioning the blow.

The real nightmare was the 1973 to 1974 recession. Stocks dropped 37 per cent. But unlike the Depression, inflation surged by over 22 per cent at the same time. It was a devastating double hit. Your portfolio shrank while the things you bought got more expensive.

Even so, a 4 per cent initial withdrawal rate survived this period, sustaining a portfolio for at least 33 years. In most other periods, the money lasted 50 years or more. That’s the outcome of planning for the worst rather than hoping for the best.

Stocks for the heavy lifting

Here’s where Bengen’s findings get counterintuitive. You might assume that retirees should play it safe and load up on bonds. They should get less volatility, more peace of mind. But the data says otherwise.

Bengen tested portfolios ranging from zero per cent stocks all the way to 100 per cent stocks.

His findings were that holding too few stocks did more damage than holding too many. Portfolios with less than 50 per cent in stocks consistently ran out of money faster.

The reason is straightforward. Bonds simply don’t generate enough long-term growth to sustain decades of inflation-adjusted withdrawals.

The sweet spot was between 50 and 75 per cent in stocks, with the rest in bonds. At 75 per cent stocks, the results were striking.

Using Bengen’s recommended 4 per cent withdrawal rate, 47 out of 51 historical scenarios lasted the full 50 years, compared to just 40 out of 51 with a 50/50 mix. Only two years fared slightly worse, and by just a year or two.

Going above 75 per cent, however, became counterproductive. Depression-era scenarios dragged worst-case outcomes below acceptable levels.

Get smart: a bedrock for retirement thinking

Since 1994, many iterations and new ideas have been built upon Bengen’s work. Researchers have debated whether the rate should be higher or lower, proposed dynamic strategies that flex with market conditions, and questioned whether the rule applies outside the US.

And yet, Bengen’s study remains a bedrock – not because it’s the final answer, but because it established a disciplined way of thinking about the hardest question in retirement. Every serious withdrawal framework since has built upon, refined or responded to his original insight.

For investors here in Singapore, there’s also an alternative worth considering. Many quality Singapore-listed stocks offer dividend yields of 4 to 5 per cent.

And unlike the fixed withdrawal in Bengen’s model, some of these dividends can grow steadily over time, giving retirees a rising income stream without having to sell a single share.

Whether you follow the 4 per cent rule, build a dividend portfolio or combine both, the underlying principle remains the same: don’t plan for the average.

Plan, instead, for the unexpected. And give yourself enough margin that even the worst case won’t keep you up at night. Your hard-earned million dollars deserves that kind of care.

The writer owns units of Infinity US 500 Stock Index fund, which tracks the S&P 500. He is co-founder of The Smart Investor, a website that aims to help people invest smartly by providing investor education, stock commentary and market coverage.