How Sequence of Returns Risk Messes Up Retirement and the 4 percent rule

How Sequence of Returns Risk Messes Up Retirement and the 4 percent rule

In our earlier blogpost, Does the 4 percent rule work in Singapore, we tested the 4 percent rule, using historical returns for Singapore stocks and bonds, and found that it does not quite work. At best, the data supports a 2% or 3% rule only. We also examined ways to increase the success of the rule in 4 ways the 4 percent rule can work. The best results come from using a yield shield, or using annuities. But still, we can only get up to a 3.5% rule which works. Other methods, such as adjusting spending in retirement, do not work so well.

What’s the problem with the 4 percent rule?

Why is it so difficult to make the 4 percent rule work? Isn’t this rule the standard mantra of the FIRE movement, meaning that many others are using it? The reason for these poor outcomes is the Sequence of Returns Risk, which is particularly relevant for Singapore retirees, due to the high volatility and low returns of domestic stocks.

Sequence of returns risk is the danger that the timing of withdrawals from a retirement portfolio will affect the overall rate of return on the portfolio negatively, leading to the portfolio running out of money early in retirement. This can have a significant impact on a retiree who depends on the income from a lifetime of savings and investing and is no longer contributing new capital that could offset losses through Dollar Cost Averaging (DCA).

This risk has less impact on safe investments like government bonds, which have predictable, if unspectacular returns. It has greater effect on investments that can go up and down over time, like stocks, or gold. But we cannot avoid it! If we leave all the assets in government bonds, we might not get enough return to offset inflation. If we put it all in growth stocks, we can beat inflation, but risk losing all the money!

Also, it is a matter of luck! If you retire at the peak of a bull market, you might find your portfolio crashing in the downturn. If you retire at the bottom of the bear market, you might end up with more money than the beginning!

Sequence of Returns Risk in Singapore

Let’s take a look at an example of sequence of returns risk in Singapore. Suppose John Toh retired on 31st December 2007 and put all his money into the STI ETF. Every 1st January, he withdraws $40,000 (adjusted for annual inflation of 2%) from his account, either from the accumulated dividends over the past year, or by selling his ETFs. What is the outcome over the past 11 years?

Unfortunately, the STI ETF did not have a good run in the past 11 years. The stock market crashed in 2008 due to the Global Financial Crisis, and only recovered to it’s original level in the past few years:


Here’s how John Toh’s portfolio looks like over time:

DatePortfolio Valueafter withdrawal ofand dividends of
Jan 2008$960,000$40,000
Jan 2009$532,785$40,800$36,266
Jan 2010$823,411$41,616$26,939
Jan 2011$925,060$42,448$17,645
Jan 2012$833,075$43,297$22,912
Jan 2013$913,314$44,163$26,558
Jan 2014$825,756$45,046$23,313
Jan 2015$888,840$45,947$23,517
Jan 2016$663,945$46,866$25,284
Jan 2017$760,796$47,804$23,478
Jan 2018$851,719$48,760$24,708
Jan 2019$749,644$49,735$26,884

Despite dividends covering about 50% of his annual withdrawals on average, John still needs to sell some of his ETFs every year to fund his retirement. After 11 years, his portfolio is only worth 75% of what he started out with in 2008. From our earlier post Does the 4 percent rule work in Singapore, we see that this makes it likely that his funds will run out between year 25 and year 30 of retirement.

What about retiring in other years?

Now suppose John’s sister, Jane Toh, retires on 31st December 2008, and does exactly what John does. Luckily for her, the beginning of 2009 is also when the bottom of the bear market in Singapore stocks is. Here’s how Jane Toh’s portfolio looks like over time:

DatePortfolio Valueafter withdrawal ofand dividends of
Jan 2009$960,000$40,000$48,539
Jan 2010$1,517,852$40,800$48,539
Jan 2011$1,741,860$41,616$32,525
Jan 2012$1,607,735$42,448$43,142
Jan 2013$1,804,518$43,297$51,253
Jan 2014$1,676,361$44,163$46,061
Jan 2015$1,852,659$45,046$47,741
Jan 2016$1,435,637$45,947$52,700
Jan 2017$1,701,554$46,866$50,766
Jan 2018$1,966,157$47,804$55,259
Jan 2019$1,796,572$48,760$62,060

What a difference a year makes in retirement! After 10 years, Jane Toh has 80% more than what she started her retirement with. And it looks like her children will end up inheriting much more than what she had when she retired!

Now, what if someone retired a year later, like their cousin Jimmy Toh? Here are the outcomes over the past 9 years:

DatePortfolio Valueafter withdrawal ofand dividends of
Jan 2010$960,000$40,000
Jan 2011$1,087,200$40,800$20,571
Jan 2012$988,363$41,616$26,928
Jan 2013$1,093,506$42,448$31,508
Jan 2014$999,310$43,297$27,912
Jan 2015$1,087,094$44,163$28,459
Jan 2016$824,310$45,046$30,923
Jan 2017$957,955$45,947$29,149
Jan 2018$1,086,971$46,866$31,110
Jan 2019$972,370$47,804$34,309

Again, we see the luck or randomness inherent in Sequence of Returns Risk. Our December 31st, 2009 retiree, Jimmy Toh, ends up with about the same amount in his account after 9 years. This doesn’t get him out of danger of outliving his funds yet, but he has a decent shot, unlike John Toh, who retired two years earlier. However, unlike Jane, who retired a year earlier, Jimmy is unlikely to leave his children as much when he passes on.

Some thoughts and conclusions

The illustrations of Sequence of Returns Risk in Singapore as shown in the chart below are all incomplete and inconclusive, since they only cover about 10 years, and not the 30 years expected in retirement.

John’s, Jane’s and Jimmy’s portfolios 2008 – 2019

However, there are a few ideas we can take note of:

  1. It is safer to retire when markets are down, and yet you have enough to finance your lifestyle using the 4 percent rule
  2. If you retire when markets are still going strong, be careful by withdrawing less than the 4 percent rule!
  3. It helps when your dividends and other income is more than enough to cover the yearly withdrawal amounts

As always, easier said than done! While it is safer to retire when the markets are down, fear that the downturn will be prolonged means that it will be hard to walk away from working and and safe income to start retirement. And this applies not just in Singapore, but even for the investor in the S&P500, as we show here. Also, here we have seen both the good and bad cases, where the investments were able to sustain the retiree through retirement, and where they couldn’t. How do you know if you still have enough to carry on, especially after going through a market downturn? We address this question here.

As for point 2, it is usually during a bull market that many of us will reach our retirement portfolio target, making it more likely that we will retire at the peak of the market! Also, there will be optimism that the bull market will continue for a while.

Finally, point 3 is essentially the Yield Shield which can help combat Sequence of Returns Risk. This is something we shall return to in our next posts here and here! Some more general thoughts on Dividend Investing and how the Yield Shield can hedge against Sequence of Returns Risk here

More recently, researchers have suggested using borrowing, through a Home Equity Line of Credit for example, as a way of mitigating sequence risk. We look at how this may have worked in the past here.



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