You will be able to test your plan against a longer life and decide what you would cut first.
Running out of money in retirement is a risk. Running out in very old age is worse, because you can no longer earn more and no one is obliged to support you. Test your plan against a longer life than the one you planned for, and decide in advance which spending gives way first.
In lesson 1.3, "Inflation and the age you plan to", Jasmine chose 95 as her planning age. That is the age her plan is built to last until. Then her aunt turned 99. At the birthday lunch someone joked that the family was going to bankrupt the CPF Board, and Jasmine laughed. At home she opened her spreadsheet to see what would happen to her plan if she were the one who reached 100.
The simplest longevity test is to extend your drawdown map five years past your planning age and see what happens. To extend it, copy the last row down. Jasmine did this with her map from lesson 3.4. Her map runs on central assumptions, which are its base-case assumptions. Under them her savings are about S$710,000 at 95, S$626,000 at 96, S$431,000 at 98 and S$196,000 at 100 (all example figures), so her plan survives to 100.
The five-year extension measures margin, which is how many years of spending the plan still has in hand past the planning age. A plan that runs out at 96 when you planned to 95 has almost no margin. A plan that still has years of spending in hand at 100 has a lot of margin.
A balance that far in the future needs converting to today's prices before you judge whether it is enough. Jasmine's S$196,000 is forty-five years from now. At her inflation assumption of 2.5% a year, it is worth about S$64,000 at today's prices. Next, compare the final balance with spending in the same year, in the same dollars. Her map shows spending of about S$151,000 at 100 in future dollars, so S$196,000 covers a bit more than one year of spending.
Her margin sits between those two cases, and it only looks that way under central assumptions. Lesson 5.4, "Run your plan through three scenarios", shows how quickly a bad decade can use it up.
Two sources pay for Jasmine's nineties: her savings and a level CPF LIFE payout of S$19,200 a year. A level payout stays the same in dollars. Over about thirty years of inflation it covers a shrinking share of spending, and that is the cost of a level payout. By 95 it covers only about 15% of Jasmine's spending.
The payout also keeps arriving every month for life, including at 100. CPF LIFE is her floor: the one source of income in the plan that cannot run out. If her savings hit zero at 97, CPF LIFE would still pay her. Without it she would have no income at all.
If you expect to live long, the CPF LIFE choice in lesson 2.2, "Choose your CPF LIFE plan and start age for the whole plan", matters most. You can raise your floor by deferring CPF LIFE or by choosing a plan whose payouts rise. A higher floor buys more protection in exactly the years when your savings are thinnest. Lesson 2.2 sets out the tradeoff: you either take lower income earlier or spend more of your savings in the waiting years.
Real spending in later life does not follow a straight inflation line, because two forces pull in opposite directions. Flexible spending usually falls. This is spending you can choose to cut, such as travel, eating out, gifts and hobbies. Many people travel less, eat out less and buy less in their late eighties and nineties than in their sixties. David Blanchett at Morningstar described a retirement spending smile. In this pattern, spending tends to fall through the middle years of retirement and rise again near the end. Jasmine's plan keeps flexible spending rising with inflation all the way, which is a cautious assumption.
Care costs can rise sharply. Someone who needs help with daily activities may pay for a helper, home care services, day care or a nursing home, possibly for years. These costs often start in the same decade that travel stops. So the spending you could cut late in life may shrink just when a new essential cost appears. Module 6 puts numbers on care costs. Jasmine added a care cost of S$2,000 a month at today's prices from age 85, and her money ran out at 95, even under central assumptions.
Decide what to cut now, while you are calm and able to weigh the trade-offs. At 90 and under pressure, the decision may not be yours to make at all. List your spending in the order you would give it up, from most flexible to essentials. Jasmine's order is:
overseas travel, which she expects to fade by her mid-eighties anyway eating out and gifts her hobbies budget, cut to the basics the home: renting out her spare room or moving somewhere smaller, both explored in lesson 6.1, "Your home as a retirement asset" essentials such as food, utilities and healthcare, which come last and which she will not cut
Then test the first cut in your map. Jasmine cut her flexible spending by 20% from 85 onward, which was about S$5,900 a year at that point. That left about S$368,000 at 100 instead of S$196,000, nearly doubling her margin. A modest, planned cut to flexible spending in your late eighties can greatly increase your margin at the end.
Write the list down, and either share it or keep it with your records. Someone may one day manage your money under an LPA, which is covered in lesson 7.4, "Who decides for you: the LPA, AMD and care wishes". Your list tells that person what you would want cut and what you would want protected.
Before the activity, copy your drawdown map and extend it five years past your planning age. Read the balance in the final row, convert it to today's prices, and work out how many years of spending it would pay for.
Add five years to your plan and write down what you would cut so the money lasts.
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