What can retirees do about longevity risk?

A recent National Seniors Australia report highlights that the majority of older Australians worry about outliving their savings. Much of this concern is driven by the fact that most retirees and pre-retirees don’t know how long they will live. As a result, they don’t know how long they need their savings to last and many under-spend because of this fear of running out. This fear can be alleviated with a good plan for retirement income.

Increasing life expectancy

At face value, a longer life is a good thing. It only becomes a problem when we don’t have a proper plan to pay for it. Planning can be a problem because the length of our life is uncertain. We are living longer, but older people don’t always know what number to use for planning. Numbers from the Australian Bureau of Statistics (ABS) measure life expectancy from birth. For 2016-18 , the life expectancy of an Australian male is 80.7 years and 84.9 years for a female.

These ABS numbers are low for two reasons. Firstly, they are an estimate from birth, so the average includes people who die young from accidents or illness. Having reached 65, you will live longer than average because you are already a survivor. Secondly, improvements in health mean that younger people will live longer than older people today.

Adding the mortality improvements for someone approaching retirement means the average 65-year-old will live up to seven years longer than an average newborn. Based on the improvements of the past 25 years a 65-year-old today will live, on average, to 88 for males and 90 for females.

Not everyone is average

Remember that these numbers are only averages. In reality, there is a wide distribution of outcomes either side of the average. A plan that only lasts up to the average life expectancy will disappoint one in two retirees.

As most people worry about living longer, they adjust by reducing their spending to ensure that their money lasts. The risk here is that they miss out on enjoying the benefits of spending while they are young enough to enjoy it and endure a lower standard of living than they deserved. This might be good news for the ‘kids’ inheritance, but spending it on themselves will be better for many retirees.

Building the right plan

It’s possible to build a retirement income plan that can provide retirees with some confidence to spend. 

Retirees need an understanding of essential spending and what are the ‘nice-to-haves’ that can be reduced if necessary.

In simple terms, the essentials for a retiree are things that they would worry about missing out on, such as paying the electricity bill and outings with the grandkids.

Having identified these items, a retiree can check whether they would be able to afford them no matter what happens to their savings. For most older Australians, the Age Pension will provide some help, but for many, especially those with a reasonable level of retirement savings, it won’t be enough.

For these people, a guaranteed lifetime income stream, such as a lifetime annuity, can bridge the gap. A lifetime annuity provides a guaranteed monthly income that is regular and dependable. It can help to cover essential expenses and maintain standard of living for as long as one lives, even if their original investment has been fully paid out to them due to living longer than average life expectancy. Typically, this is done with part of the retiree’s savings, with the remainder invested to support their desired lifestyle.

The confidence to spend

Understanding essential living expenses and having a plan to cover those expenses provides retirees with the peace of mind to confidently spend their savings on the things they really want to fully enjoy their retirement. They can take the overseas holidays or do more socialising with friends while they are relatively young and can still get the most out of life. When life starts to wind down, these retirees will have cash flows for all the essentials that they need and can take comfort in the knowledge that they were able to enjoy life while they could.

Source: Challenger