Thursday, October 26, 2023

#8 The Missing Billionaires - What mortal retirees really need


In the last article, we concluded that if you live forever and invest in a balanced portfolio, the prudent and long-term thing to do is to spend about 2.5% of the value of your portfolio and adjust your expectations to the rising and ebbing size of your wealth hoard.

But what happens if you do not live forever? 

In most cases, people die at age 85 in Singapore and if you spend 2.5% of that wealth annually, it is highly likely that you will leave too much to your beneficiaries after you die and underspending in your life. Which is fine for married folks with kids but not singles. 

The solution is to buy annuities, which allow you to buy a monthly cash flow that will pay you so long as you live. This will boost the amount of money you can spend safely while you are still alive at the cost of losing a fraction of your wealth. 

But there is a problem. US firms put so many conditions and fees on their annuities that in practice it is not worth owning them, that's even when authors painstakingly claim that decent annuities without complex financial engineering can earn companies a hefty profit for companies. The situation is even worse in Singapore, where annuity products off the shelf aren't even designed to pay for life!

But thanks to CPF, we have CPF life, where up to $300,000 can be bought under the Enhanced Retirement Scheme that will indeed generate a monthly payout for life. CPF Life is not designed to provide a comfortable retirement as amounts are way below what a basic standard of living is for a 65-year-old in Singapore, but it remains the most attractive option against all other commercial alternatives.

So as far as any Singaporeans including myself are concerned, I will take every opportunity to hit my ERS. I'm not far away from ERS, in spite of not working in a conventional job for close to a decade, but I have to channel as much as legally possible to hit ERS earlier. 

If there is anything I want from CPF, it is to extend CPF-OS to SA transfer to ERS levels and to allow the $8,000 annual tax-deductible top-up until that level. If the book is right, getting about $1,500 of today's money for life will definitely improve outcomes for many investors from the point of view of a person's expected utility of spending income, this is even if they have multi-million dividend portfolios. 

( Note that if your dividend portfolios do well at age 65, you can even defer your CPF-Life payouts to get a bigger monthly payout. This is a very powerful form of optionality for Singaporeans. )

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