THE OPTIMAL ASSET ALLOCATION STRATEGY FOR RETIREMENT PLANNING IN THE SINGAPORE CONTEXT

Abstract

This study examines the optimal allocation strategy to bonds and stocks for a Singaporean retiree. Contextualized in Singapore, the study simulates returns for bonds and stocks based on the Exchange Traded Funds listed on Singapore Stock Exchange. The findings are described according to 4 scenarios. Scenario 1 assumes an average Singaporean retiree with average initial wealth, average withdrawal rates and live up to the age that 50% of Singaporean will live. The results shows that the optimal strategy for an average Singaporean is to invest 60% to 80% in stocks. Scenario 2 examines the case with variable life longevity. If a retiree expects to live a shorter life, he or she should invest more in bonds. A 100% investment in bonds will guarantee the retiree to live up to 15 years after retirement. If a retiree expect to live longer, he or she should invest more in stocks to maximize the probability of positive wealth at later stage of his or her life. Scenario 3 examines the effect of withdrawal rates on optimal allocation strategy. With higher withdrawal rate, the optimal allocation strategy changes from more investment in bonds to more investment in stocks. This scenario also proposes a minimum withdrawal requirement based on data related to expenditure by Singaporeans. Scenario 4 outlines suggests that with more initial wealth, the retiree should invest more in bonds for safer returns while with lower initial wealth, the retiree should invest more in stocks to generate more returns. The findings highlight the risk and return tradeoffs between investing in bonds and stocks. The author also proposes alternative income sources in an event where income from the investment cannot support the retiree throughout the retirement. Lastly, it is emphasized that multiple factors, such as life longevity, initial withdrawal rate etc. must be simultaneously considered for more comprehensive retirement planning strategies.