Combining 4% Rule with CPF LIFE for a sustainable retirement

By Lynette Tan

If you’ve only got a minute:

• The 4% rule offers flexibility for drawing down your private investments, while CPF LIFE provides guaranteed lifelong payouts to cover basic retirement needs.
• Combining both creates a layered income strategy—use CPF LIFE as a secure income floor and apply the 4% rule to fund discretionary or lifestyle expenses.
• This hybrid approach balances certainty and adaptability, helping buffer against market downturns and offering peace of mind for a sustainable retirement.

One of the biggest challenges in retirement planning is making sure that we do not outlive our retirement nest egg. While many focus on how much they need to save for retirement, the question of how to draw down our retirement savings sustainably is equally important.

There are a number of ways that retirees can plan to draw down on their retirement funds and one popular way is the 4% withdrawal rule.

We can combine the 4% rule with our CPF Life (Lifelong Income for the Elderly) annuity payouts to help us achieve a more robust path for retirement security.

What is the 4% Rule?

The 4% rule is a widely referenced guideline in retirement planning, especially among those managing their own investment portfolios. It suggests that you can withdraw 4% of a balanced portfolio of 50% in stocks and 50% in bonds in the first year of retirement, and then adjust that amount for inflation each year thereafter. This rule was designed to ensure that your savings could last for at least 30 years, based on historical market data.

This strategy originated from research by financial planner William Bengen in the 1990s. He analysed historical returns of U.S. stocks and bonds and found that a 4% withdrawal rate would have successfully sustained a retirement portfolio through even the worst market periods, such as the Great Depression and the stagflation of the 1970s. Since then, the rule has become a foundational concept in retirement drawdown planning.

However, the 4% rule isn’t without its risks. It assumes a certain level of market performance, which may not hold true for every retiree’s time horizon. The approach is sensitive to market volatility and inflation, particularly in the early years of retirement—a phenomenon known as the sequence of returns risk. Poor market performance early on can significantly impact the longevity of your portfolio, even if markets recover later. This makes it crucial for retirees to monitor their withdrawals and consider adjusting their spending in response to market conditions.

Contrasting the 4% rule with CPF LIFE

On the other hand, CPF LIFE provides guaranteed monthly payouts for life, starting from age 65. You may defer the payouts and start them at age 70, at the latest. It’s funded by your CPF Retirement Account savings and administered by the government, making it one of the most reliable income sources for retirement. The key benefit of CPF LIFE is peace of mind: no matter how long you live or how the markets perform, you’ll continue receiving a monthly income.

In contrast to the 4% withdrawal rule, CPF LIFE offers less flexibility but more certainty. Once you join CPF LIFE, your Retirement Account funds are converted into an annuity, meaning you no longer have access to that lump sum. You can’t adjust payouts, make ad hoc withdrawals, or react to changing market conditions. While this lack of liquidity can be limiting, especially for those with higher or fluctuating lifestyle expenses - it also eliminates the risk of running out of money. For retirees who value predictability and stability, CPF LIFE offers a strong foundation.

The Core Differences: 4% Rule vs CPF LIFE

Combining 4% rule and CPF LIFE 

Combining the 4% rule with CPF LIFE offers a balanced retirement drawdown strategy. By layering your income sources, you create both security and flexibility. CPF LIFE serves as your income floor—its lifelong, inflation-adjusted payouts can be used to cover essential expenses such as food, utilities, and healthcare.

On top of this foundation, you can apply the 4% rule to your investment portfolio. These withdrawals can fund discretionary spending such as travel, hobbies, or support for your children, giving you the freedom to enjoy retirement on your own terms.

This hybrid approach also helps buffer against sequence of returns risk, where withdrawing from volatile assets during a market downturn can hurt your portfolio’s longevity.

During tough economic periods, you can lean more heavily on the stable payouts from CPF LIFE and scale back withdrawals from your market-linked investments. This flexibility helps preserve your investment capital and increases the long-term sustainability of your nest egg.

Perhaps most importantly, having a reliable income stream through CPF LIFE offers psychological comfort giving you the confidence to stay the course with your investment strategy, even when markets are turbulent.

Illustration

• Danny, who turned 65 this year, managed to hit his FRS when he was 55 and has $500,000 in private investments, with 50% in equities and 50% in bonds.
• Accordingly, his CPF LIFE monthly payout amounts to S$1,700.
• His investment portfolio (drawn down using the 4% rule) funds travel, healthcare, and leisure.

Based on the 4% withdrawal rule and historical data, he can decide to withdraw $20,000 a year (4% of $500,000) in his first year of retirement.

Using this approach, Danny will receive around $1,700 + ($20,000/12) = $3,366 per month for his retirement income.

After the 1^st year, he could increase his withdrawal by 2% every year. Based on Bengen’s research, Danny’s portfolio will last for at least 30 years.

Withdrawal variations to consider

It is important to note that there is no one-size fits-all retirement income withdrawal strategy as everyone has different needs and considerations.

You may consider these other tweaks to the 4% rule & CPF LIFE withdrawal strategy:

• Using 3% withdrawal rate for investments for more conservative approach
• Using 5% withdrawal rate for investments for a more comfortable retirement
• Guardrail Strategy - withdraw 4% annually but reduce the amount if your portfolio drops below a set threshold (e.g. 80% of the starting value), and increase it slightly in strong years.
• Percentage-Based Approach - withdraw a fixed percentage (e.g. 4%) of the current portfolio balance each year instead of the initial balance, allowing spending to flex with market conditions.
• Topping up your CPF to Enhanced Retirement Sum for a higher fixed monthly payout
• Defer CPF LIFE payout - For each year you defer CPF LIFE (up to age 70), your payout increases by up to 7% annually.
• Front-loading - Some retirees prefer to front-load their spending (e.g. 5% in early years) when they’re healthier and more active, then scale back later. In this way, CPF LIFE acts as a safeguard in later years, ensuring you still have a base income as private investments dwindle.

By blending the 4% rule with CPF LIFE, retirees can enjoy the best of both worlds: a stable, lifelong income to cover essentials and the flexibility to support a dynamic lifestyle. This combination creates a well-rounded, resilient retirement plan that adapts to both market conditions and personal needs over time.

Ready to start?

Start planning for retirement by viewing your cashflow projection on Plan tab in digibank. See your finances 10, 20 and even 40 years ahead to see what gaps and opportunities you need to work on.

Plan with DBS  Plan with POSB

Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.

Let's Meet

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.