Australia’s average life expectancy is at a record high, prompting financial advisers to rethink the way we plan for retirement.
Since 1977, life expectancies have increased by 10 years for men and 8 years for women, and now sit above 80 years old for both.
While that’s wonderful news, it also presents a challenge for retirees worried about outliving their savings.
Research by the World Economic Forum found that most Australians will run out of superannuation 11 years too early as retirement savings struggle to keep pace with rapidly growing life expectancy.
But new research from the Actuaries’ Institute shows the way financial advisers are using ‘longevity tables’ – actuarial measures that assess the financial risks of a long life – can be amended to better reflect our longer lives.
These tables are used as the foundation for a lot of financial advice software, and according to Actuaries Institute fellow Jim Hennington these programs too often use the average life expectancy as the basis for their modelling.
Given half of Australians will live beyond the average, using it to plan someone’s retirement income gives them a 50 per cent chance of outliving their savings.
“Using averages masks a lot of the risks that real retirees face, and a lot of retirees are rightly anxious about outliving their savings,” he told The New Daily.
“And about a third of retirees, once they hit 80 years old, do outlive their savings.”
Instead, the models used to work out how much money retirees can afford to spend need to set their age expectations much higher, Mr Hennington said.
For example, a healthy couple made up of a 65 year old man and a 62 year old man would need to assume the couple will live to the age of 100 – 16 years longer than most current models – to give them an 80 per cent chance of having enough savings.
Speaking to The New Daily, Association of Financial Advisers (AFA) national president Marc Bineham welcomed the research.
Mr Bineham – himself a financial adviser with Noall & Co – said many advisers already include a buffer of a few additional years in their planning processes to account for longer lives and the new data will improve people’s retirements.
“Most planners I know who are looking at retirement projections will use 90 or 100 now, even if 87 or 86 is what the average is. It’s just that comfort factor of increasing it because people simply are living longer now,” he said.
“We’re even seeing now some of the calculators, that you would feed a date and an amount you’d like and out would come an amount you needed saved – becoming far more versatile.”