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The 2-3% Yielding Freehold Property is a Low Safe Withdrawal Rate

2 days ago, I wrote an article exploring the timing of retiring during a financial meltdown and explain the immense advantage of not drawing down the wealth during that period.

Since then, I received an email from a long time reader, perhaps pointing out some things that I do not get so well.

Since he is also a retiree, he presents his perspective how retirement can be better structured.

His reply to my post:

I felt compelled to discuss this issue.

Having retired at age 60, XX years ago, the philosophy is not how many years the amount of money will last. We should plan it to last in perpetuity.

Your article based on American literature of Karstan from Early Retirement Now reflects just that. It is contradictory to our Asian culture whose belief is to plan and extend wealth in perpetuity not in 30 years but also for inheritance.

Let me show your readers how.

With a million in hand, through some fortune of CPF, gratuity or pension or some divine intervention, one should put the money away for at least a year. It depends on your financial maturity in managing wealth.

If it is from sudden windfall, the period must be longer to calm oneself, and accumulate financial knowledge on managing this windfall. If the sum is from expected events example, pension, gratuity, stocks bonus etc, usually these recipients are capable persons who are able to manage their own money.

Once the dormant period is over and hopefully accumulate enough knowledge and maturity, one is less likely to squander the wealth.

Suggested Method to preserve wealth in perpetuity in Singapore: bid your time to purchase an investment property. As Warren Buffet suggested, invest in the National economy. In Singapore, a million is not going to buy any freehold today. Even if it is a 99-year leasehold, one should fetch a returns of 2-3% returns, I.e. $20-30k per annum. Couple with CPF Life payout monthly, one should have sufficient for basic living. This would leave the preservation of capital, the property or income machine generator as you put it. The home is also a good inflation hedge.

By then, most of life’s burdens would have been fully paid off: home loans, children expenses.

I think if I were to summarize the main points are:

  1. Kyith got it wrong about how many years the money would last. It should be to plan the money to last till perpetuity
  2. American concepts do not work so well in Asian culture
  3. You should incubate your wealth in cash for one year, where you spend that one year beefing up your competency
  4. To preserve your wealth, get a freehold property. The property will throw out a 2 to 3% return which is enough for basic living. Supplement that with CPF Life Payout. You should be debt free and burden free by then.

Here are my thoughts.

The Misinterpretation of the Safe Withdrawal Rate

I think it is not whether these western concepts if workable or not workable. The withdrawal rate that is discussed is just mathematics.

The withdrawal rate is like the internal rate of return. The internal rate of return indicates return performance, factoring in time, and measures against opportunity cost.

The withdrawal rate measures paying out inflation adjusted cash flow over a period of time.

Be it a dividend stock portfolio, a passive exchange traded fund portfolio, an investment property portfolio, a unit trust portfolio, an annuity portfolio, it is almost the same.

The withdrawal rate just gives you a basis of comparison.

In the best case scenario, we will always want our money to last till perpetuity. However, for that to happen, you would have to ensure you spend in a very cautious manner so that it will not be depleted.

The solution my reader gave is to base your retirement on a freehold property providing a 2-3% yield for basic living expenses.

That is basically like drawing down 2-3% of your wealth, if your entire net worth is in that freehold property.

Essentially, what my reader is talking about IS that western concept of the safe withdraw rate but an Uber conservative one where the safe withdrawal rate is between 2 to 3%.

There is nothing wrong with this western concept but whether you can relate what you have with it.

In the end everything can be related back to the safe withdrawal rate.

I would clarify one thing that I may not have explained: What is deemed as safe, depends a lot on the long term volatility of the overall portfolio of financial assets.

If my reader wants something safe, and relatively perpetual, I contend that property might not be it.

He should form a 30 year government bond ladder that yields an average of 1.6%:

  • the principal is protected
  • its yields will go up over time if future inflation/yield is higher
  • the assets are easy to understand

By doing this, it will give you a withdrawal rate of 1.6% of your wealth.

You can form a portfolio of stocks, bonds, properties and insurance plan, and eventually you will need to decide upon how much you are going to systematically withdraw from this portfolio.

And you will arrive at a withdrawal rate.

But how safe is your withdrawal rate?

Could the $1 million Freehold Property Solution work if your Annual Basic Expense is $50,000?

I could probably provide some really perpetual solutions:

  • the property solution my reader mentioned
  • the bond ladder solution
  • inflation protected bonds
  • annuity
  • dividend paying insurance plans

However, would those solution provide that withdrawal rate that you require?

If your annual basic expense is $50,000, and your wealth is $1 mil, your withdrawal rate is 5%. Those solutions provided is not going to provide you a cash flow that is close to $50,000. They could provide perhaps somewhere half of it.

So what is the solution here?

  1. Accumulate more
  2. Shift to other financial assets that allow you to take a larger withdrawal rate

This is just mathematics. I don’t think you would like solution #1.

Doing solution #2 will impact that perpetual requirement you desire.

I think my job here is to let everyone see the complexity of this problem.

The solution is always to have a near 1.5% withdrawal rate:

  1. Put in a portfolio of deposits, high grade short term bonds
  2. Spend only 50-70% of your freehold net rental income
  3. Bond ladder
  4. Spend only 50% of the dividends of a portfolio of very high quality listed business that yields 3%/yr

But you would need to accumulate 3.33 mil.

You will then proceed to ask Kyith the philosophical question:

I was born into this world, I spend my whole life to accumulate 3.33 mil and now you tell me I can only spend a miserly $50,000/yr, just so that my next generation can still have this wealth machine. Is this really worth it?

My answer is: You decide. I have shown you the mathematics. I am not going to tell you how you want to spend your money.

There is a spectrum between YOLO and being ultra conservative. You got to figure out where you stand, at this juncture of your life.

If your money cannot even last X number of years, what are the chances it will last to perpetuity?

Having explained the link between the withdrawal rate, the cash flow needed to meet your annual expenses, let us address how long the money would last.

As we lower the withdrawal rate that we spend, the money will last closer to perpetuity.

The reason why we explore a safe withdrawal rate is because, we have to take care of a sensible spending amount. We have to find that sweet spot.

And thus, we explore whether the money will last 30 years, 40, 50, 60 years.

If it last 60 years, most likely, your next generation will get it.

However, if the amount does not last X number of years, we won’t even need to consider perpetuity.

Suppose there is a surge in expenses and your tenant just vacated

If your net worth is in one property, you cannot readily liquidate part of it. The most logical solution to that is, since your property is paid off, you could probably secure a line of credit that you can tap upon should there be a surge in expenses.

However, that would invite some increase risk exposure.

One single property do not allow you to liquidate your capital gains, or capital for that matter.

Given this, having financial assets such as bonds, bond funds, equity, exchange traded funds would allow you to do that if required.

I am not sure why its such a good idea to concentrate your cash flow based on a single tenant. Would that be a higher risk, or that you have more volatile cash flow, but the cash flow is more diversified.


After studying this problem for some time, I felt that looking at it from the withdrawal perspective makes the most sense.

It allows us to have a common denominator to compare, while other solutions do not.

What my reader discussed is more of the nuts and bolts of implementation. That is important. You cannot just discuss the withdrawal rate, and not talked about the implementation. After all, in order to have that rate of return, at that kind of volatility, you need to implement it well.

As a person that is rather conservative, I do get the need for wealth to be preserved, even during spending down.

Its just that I believe the withdrawal rate explains a lot of things if you know it pretty well.

Do Like Me on Facebook. Join my Email List. I share some tidbits that is not on the blog post there often.

Here are My Topical Resources on:

  1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free

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Thursday 10th of January 2019

As a former landlord, I have the following comment:

Buying an investment property for long-term capital appreciation is one thing. But it is quite another to be reliant on an investment property for cash flow generation.

Even if the property is not subject to mortgage, there are still latent costs, including but not limited to:

1) Maintanence fees for private properties 2) Property Tax 3) Agent's commission (paid once every 2 years or 1 year depending on length of TA) 4) Upkeep of property and addressing tenant's demands (e.g., new microwave, mattress, lightbulbs, water leakage, etc.)

More importantly, there are bound to be periods where the property is vacant.

All of the above reasons result in an investment property being an unattractive means of cash flow generation / passive income source.

If you already have an existing source of passive income from a portfolio of bonds and stocks, an investment property may be a good way of diversification and risk mitigation.

However, if like most, you only have sufficient assets for allocation in one investment class, skip the property and focus on more liquid stocks or bonds.


Friday 11th of January 2019

Hi Edwin, thanks for sharing your invaluable experience. I have always wanted to hear what former landlords think and appreciate your sharing. I will take note of your blog as well.


Tuesday 25th of December 2018

Rental properties can be very useful for retirement income, but to throw all or most of one's fund into a single or even 2 physical property(ies) is pretty risky, ironically enough.

With a super concentrated retirement "fund" (asset class, sector, geography), timing & luck is everything. You need to (1) invest when things are really scary & crappy (even scarier than in stocks today), and (2) you need to hope that the country / authorities are able to navigate their way back to prosperity, as physical properties are dependent on the health of the local economy.

Saying 2%-3% rental yield is also very telling .... that's among the lowest rental yields S'pore has ever experienced. And rental yields have been coming down over the past 10 years. This speaks to more expensive valuation for properties, as well as subdued outlook for rental & property market.

The above goes back to fundamentals of how to better guarantee a retirement as Kyith has been mentioning many times --- either save a (much much) larger amount so you can have a (very) slightly more diversified 5-8 various rental properties, and / or implement your property acquisitions during deep recessions when rental yields can hit 5%-6% (provided you can get tenants).

When you are totally dependent on rental income from a single property, your mental & financial capital are both impacted as well. Very hard to be stoic, patient, have bargaining power when you can't get a tenant for >= 2 months.

Running a rental is also like running a business --- you definitely need to set aside income for capex and operating costs. No. 1 headache will be type of tenants you get. No. 2 headache will be the wear & tear.

And jokers who suggest you can outsource tenancy & property maintenance usually have no landlord experience themselves. It's ludicrous to hire a tenancy manager for less than 3 or 4 high-end residential properties, as they are not cheap.

Once again, I'm not saying rental properties cannot be used to fund a long term retirement. You just have to treat & value properties just like how you treat any other financial assets like stocks & bonds. I have an ex-colleague who is retired with a stable of 5 rental condos --- but it took him almost 40 years to clear off all the mortgages. He retired at 68. Don't think this is what many of you are thinking of. LOL!


Tuesday 25th of December 2018

Hi Sinkie, thanks for sharing your experience. I think those folks who manage to get their property at a future 4% rental yield would think its worth while. On $1 mil, you have a net cash flow of $40,000.

What I would like to emphasize is do we wish for perpetuity or for more spending power? I think there is a fine line there.

I will throw out an alternative situation. We try to guarantee perpetuity, and the income is not enough, and the children have to somehow supplement that income.

Which is more important? For each of us the answer will be different.

Thanks for sharing your friends example. What is his personal take on what he has done?


Tuesday 25th of December 2018

I have owned a single rental property. It is one huge headache. Now I have the money in REITs, very diversified and professional management teams. No more headaches.

I had to smile when he stated that in retirement the financial burden of having kids is over. But at the same time he wants to preserve capital so they can inherit it.

Is that not essentially carrying the burden until death?


Tuesday 25th of December 2018

Hi Bob, thanks for sharing your experience on the rental property. Could you explain roughly what kind of headache? is it a one time issue, or something that consistently bugs you.

I think we treat debt as a burden, providing that as a burden. But i think i omit that, by trying our darnest to preserve a bequest, that is a challenge in itself.


Tuesday 25th of December 2018

Quote : One single property do not allow you to liquidate your capital gains, or capital for that matter.

If one hasn't been through personal crisis on the ground and feel the urgency of sudden spike of liquidity needs. Pray not another crisis like SARS happening. The Rich just want liquidity now at whatever cost and escape to other countries. It is far better to be alive with less than to die richer.


Tuesday 25th of December 2018

Hi uncle CW, do you mean the rich only recently realize they need liquidity more than in the past? perhaps you can elaborate.

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