I explained the increasing life expectancy and the high proportion of people that will survive to 85 and 95. This is higher than what most people think.
I estimated the cost at age 55 of buying the longevity insurance which pays $300 a month from age 85 for the rest of the lifetime, as follows:
Male Female
No increase, no refund $6,818 $ 8,759
No increase, with refund $9,824 $11,594
Increase by 2% yearly, no refund $15,137 $19,548
Increase by 2% yearly, with refund $28,923 $32,991
With refund: the original sum is refunded (without interest) on death of annuitant
Increasing payout: the amount increase by 2% yearly from the time of purchase.
I recommend to buy the increasing annuity, with no refund for those who do not have any serious medical problem. For those who are in poor health, they should buy the increasing annuity with full refund.
2 comments:
Hi Mr Tan,
1) Based on your example, what is the breakeven point, ie how many years beyond age 85 between the aggregate annuity sums received under the annuity scheme vs saving the same original sum earning compounded interest to age 85 and then paid out in equal sums same as that in the annuity scheme? What is the estimated the survival rate at that breakevn year.
2) In the example, the annuity sum of #300 per month is paltry if adjusted for time and inflation and is certainly below basic subsistence level. Isn't this therefore a neither-here-nor-there retirment plan and something of a much-ado-about-nothing on a mega national scale and high costs, especially for those who have other savings / investments & means. For the poor living from hand-to-mouth and who have below-par minimum sums, the front end annuity premium sum is relatively huge which they could ill-afford & would desperately need to live for "today" before they can even have a chance to see the far "tomorrow".
3) Are there acturial evidence or data to show the co-relation between wealth or income level and longevity. If there is a direct co-relation, which I suspect there is because on average people with better means have better diet, healthcare and medicare, then wouldn't the proposed compulsory annuity scheme tragically turn out into a case of the reverse of robbing Peter to pay Paul?
I do agree that the sum of $300 is insufficient to support even a subsistence living. In 30 years time how much of its purchasing power would have been eroded. $300 may be good for today and to have the same purchasing power you may need about $700 in 30 years time assuming an inflation rate of 3%.
If you need so much , what will be the premium to set aside?
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