Retiring and Surviving in a Pandemic – The Yield Shield 6 Months On

Retiring and Surviving in a Pandemic – The Yield Shield 6 Months On

While many of us aim to be financially independent, retire early, and live off our investments (using some version of the 4 percent rule) as soon as we can, we are also painfully aware that retiring at the peak of the financial markets right before a downturn or crisis can leave our financials in tatters. This is what Sequence of Returns Risk, or Sequence Risk, does to retirement investment portfolios. And with the COVID-19 pandemic causing havoc in the financial markets this year in 2020, how do we even hope to be retiring and surviving in a pandemic?

But never fear! While our early posts looked at how and why the 4 percent rule did not work in both Singapore and the US all the time, our research also indicates that a high dividend investment approach using blue chips does have the potential to help a retiree tide over a crisis, such as the 2008 Global Financial Crisis. This works even better when it is paired with an annuity like CPF Life, but this may not be something an early retiree can get access to easily. So as a rule, an early retiree needs a larger portfolio to survive the initial retirement years, until the annuity kicks in later.

However, all the research on this retirement problem (including ours so far) has looked backwards, showing how a 4 percent rule (or more likely a less sexy 3% rule) can survive a deep downturn. What about now, during the COVID-19 pandemic that we are facing? Can we afford to retire and yet survive financially in a pandemic? To answer this, seven months ago in late February when the COVID-19 virus was surfacing across the world, right before the breath-taking plunge in global stock markets , we set up a Yield Shield Portfolio for 2020 to test whether our research can stand the test of a pandemic. How have we done so far, 6 months down the line?

A Yield Shield Portfolio for 2020

Revisiting the Yield Shield Portfolio

“Let’s rewind for a moment to understand why the 4% withdrawal rule may not work and how the Yield Shield may. Unlike the process of accumulation, when someone with a long investment horizon can ride out the ups and downs of the stock market, a retiree decumulating neither has a very long horizon, nor a source of income to tide him or her over periods of market weakness and turbulence.

“In fact, decumulation using the 4% rule is like doing Dollar Cost Averaging in reverse or Dollar Cost Ravaging! Since 4% of the initial portfolio is withdrawn every year, you have to sell more shares when prices are low. This sounds a lot like “sell low buy high”! So running into market turbulence at the start of retirement means that the portfolio will deplete too quickly to last for another 25 to 30 years.

“So this is where the Yield Shield comes in. If the portfolio has a high dividend yield, say 4.5%, the retiree can simply withdraw the 4% from dividends alone. This leaves the shares in the portfolio untouched, allowing the portfolio to regain its value when the market recovers.

To test our faith in use of the Yield Shield Portfolio for retirement, we shall set up a new Yield Shield Portfolio at the beginning of March 2020 with the aim of withdrawing 4% of the portfolio’s initial value every year, adjusting for inflation of 2%. Yearly withdrawals from the portfolio start at $4 per $100 invested per year, or $0.33 per month per $100 invested.

“The average trailing dividend yield on this portfolio selected is 4.9%, with which we will draw 4% annually, adjusted for inflation of 2% per year. Note also that of every $100 put into the portfolio, we invest only about $98. The remaining $2 is held in cash to meet the scheduled monthly withdrawals ahead of the receipt of dividends.”

How has the Yield Shield Portfolio fared over 6 months?

So, how have we done, retiring and surviving in the pandemic over the past 6 months? Has the bottom fallen out from beneath our Yield Shield portfolio and destroyed all our hopes of retiring early? Here’s how the total value of the portfolio (and the control which is the STI ETF) has evolved over the past 6 months.

Total Portfolio Value of the Yield Shield (Blue) and STI ETF (Red)
Retiring and surviving in a pandemic - total portfolio value

The Yield Shield portfolio got off to a bad start in Mar and Apr 2020, due to the high weighting in REITs which fell more sharply only as the pandemic worsened. Not so good for retiring and surviving in a pandemic! However, since then both portfolios seem to have recovered to the same level, hovering around 88% – 90% of the initial invested amount. Also, bear in mind that over this 6 month period, 2% of the invested amount was paid out to the retiree and a further 0.25% in management fees, all completely out of the cash holdings and dividends, leaving the stocks untouched. This means that the value of the portfolios would be around 90% – 92% of the original investment if this were an accumulating portfolio.

Has there been any pressure to sell stocks during these past 6 months? Well, for the Yield Shield, the answer is no. A healthy inflow of dividends has ensured that the cash buffer always remained at around 2% despite the monthly payouts.

Cash and Investment values of the Yield Shield Portfolio
Retiring and surviving in a pandemic - Yield Shield

This is in contrast with the STI ETF portfolio, where the cash holdings fall over time to close to zero as the dividends are only paid twice a year in February and August.

Cash and Investment values of the STI ETF Portfolio
Retiring and surviving in a pandemic - STI ETF

But overall, both the Yield Shield portfolio, and the control STI ETF portfolio have held up well in these past 6 months. It is a little surprising, because in previous backtests, the STI ETF portfolio did not do so well, but the raising of dividends by the Singapore banks in the past 2 years have swelled the dividend yield of the STI ETF to a level where it can sustain the monthly payouts made to the retiree without selling any of the holdings.

Here is a look at the performance of the individual components of the Yield Shield in numbers:

Performance of the Yield Shield components
Current PriceDividend PaidTotal Return
ST Engr$4.35$3.40$0.10000-20%
Suntec REIT$1.69$1.40$0.03293-15%
STI ETF$2.897$2.550$0.05900-10%

Evidently, the performance of the Yield Shield portfolio has been marred by the biggest losers, such as Comfort Delgro, Genting Singapore, Singtel, ST Engineering, and CapitaMall Trust. But historically these have been the most resilient ones, having strong business models and cash, so our faith in them for the long haul remain unchanged. If we had held off buying the Yield Shield Portfolio by a month, we would certainly have better returns, but of course, that would negate the entire purpose of this test of the resilience of a retirement portfolio!

What’s next for the Yield Shield Portfolio?

Portfolio Rebalancing

As some of the components of the Yield Shield Portfolio have dropped a fair bit, and a couple have risen, it is expected that the weights of the components will have moved form the initial 10% weight on each, as we show below:

StockInitial WeightCurrent Weight
ST Engr9.8%8.7%
Suntec REIT10.0%9.5%
STI ETF$2.897$2.550

Interestingly, as the value of the portfolio has dropped as a whole, it is the counters which have gained that are the furthest away from their initial weight in the portfolio. In any case, our research here indicates that there is little benefit from more frequent rebalancing of the portfolio, so we shall refrain from doing so for another six months.

Dollar Cost Averaging of Retirement Yield Shield Portfolios

However, what we will do is to initiate another Yield Shield portfolio, roughly 7-8 months after the first one was formed in March 2020. Historically, most downturns have a rather sharp turning point about 6 months to a year after the sharpest fall, so we will test whether dollar cost averaging the investment portfolio for retirement makes more sense than doing lump sum investing. At the current moment, there are no anticipated changes to the components of the Yield Shield portfolio.

Adjustment to Cash Holdings

Our strategy for cash holdings in the Yield Shield portfolio has been to start off with 2% of the initial investment in cash, so as to guarantee that the payouts over the next 6 months can be met without having to sell stocks. In reality, the dividends have come so frequently that we have rarely dipped below 1.5% in cash. Even the control STI ETF portfolio, which pays dividends only semi-annually has not seen the cash balance dip to zero. This result indicates that we may actually reduce the amount of cash held to 1% – 1.5% holding without adverse consequences. This will be experimented on in the next version of the Yield Shield portfolio.

Concluding Thoughts

So far, the Yield Shield portfolio has done about what was expected from it during this COVID-19 downturn, enabling us to be retiring and surviving in a pandemic. But so has the STI ETF, which makes it a possibility to incorporate within the Yield Shield portfolio itself for greater diversity. However, by historical standards, this has been an unusually short downturn so far, especially if the worst is over, so the learnings from it may be limited. But that is still okay, as it further backs up our backtest results from 2008 about how a Yield Shield portfolio can overcome the Sequence of Returns Risk in retirement.

Note that the version of the Yield Shield investing here may look similar to dividend investing in retirement, but the implementation is somewhat different, on a couple of counts:

  • Instead of living off whatever dividends are earned, a fixed withdrawal rate is set upfront, and excess dividends saved.
  • Subsequently, the payouts will be adjusted for inflation at 2%, so here will come a tome when stocks have to be sold to cover the shortfall in dividends

What this means is that the payouts will have little volatility (important in this period when dividends are being slashed!), and ultimately, unlike pure dividend investing, the holdings of stocks will have to be sold, i.e. the capital will be run down.

That’s all we have for now. We’ll check back in with the updated results of retiring and surviving in a pandemic in another 6 month’s time!

*And here’s an update on how the Yield Shield Portfolio performed for a full year!

*Some thoughts on why Dividend Investing may work to hedge Sequence of Returns Risk



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