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The #1 objective of CPF LIFE is to protect against longevity risks. The payout plans vary in how well they perform in terms of longevity protection. Here’s the order:
Worst quality longevity insurance: Basic Plan
Middle quality: Standard Plan
Highest quality: Escalating Plan
That’s insurance quality to be clear, not some other attribute of the payout plans that isn’t longevity insurance.
Maybe you don’t live past age 90 or some other age. But what if you do? Insurance is all about the “What ifs.” What if you live to 98, or 101, or 105? The Escalating Plan will come closest to supporting a stable real lifestyle, to pay for essential goods and services for the rest of your life including the years when you run the greatest risk of exhausting or losing accumulated wealth: your very last years, especially if you live a long time. All other payout plan amounts definitely lose real purchasing power over the years and decades. If you want to get a rough idea how big this loss of purchasing power is then compare today’s prices for various goods and services to the prices 35 years ago. 35 years is the difference between age 65 and age 100.
Personally I stress test all retirement financial plans to age 105. The government picks 95 for such things as property pledges (for CPF withdrawals). I think 95 is way too risky for my household and progeny. If I personally know/knew 100+ year old people (yes) then it’s definitely too risky especially given the steady progress in medical science.
Now, you may not like the financial implications of a safer planning terminal age of 105 (or some other 3 digit number). That’s up to you. But the logical financial conclusions you should draw from a later planning terminal age are quite straightforward. One clear conclusion is that more and better longevity insurance helps cost-effectively mitigate longevity risks. It’s harder, and certainly more expensive, to self-insure against longevity to age 105 compared to longevity to age 95.
An important part of insuring at least adequately against longevity risk is this related goal: “I will NEVER be a financial burden on my progeny.” Many people have this objective. Both of my parents have sizable escalating life annuities. In their cases the life annuities are pegged to the Consumer Price Index where they’re retired. That means they can never be a financial burden on their children, grandchildren, or future great grandchildren. That doesn’t mean they won’t be some other burden (time burden, really) at some point. Nor does it mean we wouldn’t help financially in the alternative. But financially there’s no way they’ll fall below a reasonable real lifestyle. They could live to 115 — one of them I wouldn’t bet against in that respect — and that’s still true.
Worst quality longevity insurance: Basic Plan
Middle quality: Standard Plan
Highest quality: Escalating Plan
That’s insurance quality to be clear, not some other attribute of the payout plans that isn’t longevity insurance.
Maybe you don’t live past age 90 or some other age. But what if you do? Insurance is all about the “What ifs.” What if you live to 98, or 101, or 105? The Escalating Plan will come closest to supporting a stable real lifestyle, to pay for essential goods and services for the rest of your life including the years when you run the greatest risk of exhausting or losing accumulated wealth: your very last years, especially if you live a long time. All other payout plan amounts definitely lose real purchasing power over the years and decades. If you want to get a rough idea how big this loss of purchasing power is then compare today’s prices for various goods and services to the prices 35 years ago. 35 years is the difference between age 65 and age 100.
Personally I stress test all retirement financial plans to age 105. The government picks 95 for such things as property pledges (for CPF withdrawals). I think 95 is way too risky for my household and progeny. If I personally know/knew 100+ year old people (yes) then it’s definitely too risky especially given the steady progress in medical science.
Now, you may not like the financial implications of a safer planning terminal age of 105 (or some other 3 digit number). That’s up to you. But the logical financial conclusions you should draw from a later planning terminal age are quite straightforward. One clear conclusion is that more and better longevity insurance helps cost-effectively mitigate longevity risks. It’s harder, and certainly more expensive, to self-insure against longevity to age 105 compared to longevity to age 95.
An important part of insuring at least adequately against longevity risk is this related goal: “I will NEVER be a financial burden on my progeny.” Many people have this objective. Both of my parents have sizable escalating life annuities. In their cases the life annuities are pegged to the Consumer Price Index where they’re retired. That means they can never be a financial burden on their children, grandchildren, or future great grandchildren. That doesn’t mean they won’t be some other burden (time burden, really) at some point. Nor does it mean we wouldn’t help financially in the alternative. But financially there’s no way they’ll fall below a reasonable real lifestyle. They could live to 115 — one of them I wouldn’t bet against in that respect — and that’s still true.
Not collectively high probability but not zero probability.
