Key to keeping retirement plans ‘real’

Retired actuary John De Ravin has written the ultimate ‘guide’ book packed with information to help everyone from teenagers to centenarians manage their money. In this extract from Slow and Steady: 100 wealth building strategies for all ages, he tells how – and why – you must work out how long you are likely to live.


Strategy 79: Work out how long you are likely to live

Read this strategy if:

  • you are approaching retirement and are trying to work out how much money you need to have in order to retire, and so you want to estimate your likely lifespan (and your partner’s likely lifespan if you have a spouse)
  • you are retired and trying to estimate your likely lifespan to help plan your annual expenditure without running too much risk of running out of funds.

No-one really knows how long they are going to live. You might get hit by a bus tomorrow, or you might live to be 100 years old, right?

Key point
While it is true that no-one knows exactly when they will pass away, to help you plan your finances it is a good idea to have a reasonable idea as to how long you are likely to live.  After all, if you have a certain amount of financial assets, and you draw down on those assets to meet your consumption needs, then (unless you always draw less than the earnings) you will run out of money eventually, so the question is: how long do you need to make your money last?

How to do it
There are several ways to estimate how long you are likely to live.

A reasonable start would be to consult the latest Australian Life Tables. These are tables based on the mortality rates of Australians in the three-year period around each census. At the date of writing, the most recent census was conducted in August 2016 and the most recently available Australian Life Tables are the Australian Life Tables 2015–2017.

To give you an idea of remaining life expectancy, the table below shows the remaining life expectancies at quinquennial intervals for males and females based on those Tables.

Remaining life expectancy by age and gender

Age Males Females
0 80.76 84.85
5 76.1 80.15
10 71.13 75.18
15 66.17 70.21
20 61.29 65.28
25 56.46 60.35
30 51.65 55.42
35 46.85 50.53
40 42.1 45.68
45 37.43 40.88
50 32.84 36.14
55 28.35 31.49
60 24.02 26.93
65 19.86 22.47
70 15.9 18.18
75 12.25 14.15
80 9.02 10.49
85 6.39 7.37
90 4.5 4.99
95 3.29 3.43
100 2.49 2.36

So, for example, a newborn Australian male baby according to the Australian Life Tables 2015–17 will live on average for 80.76 years and a newborn Australian female baby will live on average for 84.85 years. Or a male Australian retiree aged 65 may expect to live for an additional 19.86 years on average and a female aged 65 may expect to live for an additional 22.47 years.

Looking at the mortality of 65-year-olds in more detail, the Life Tables show that at least 90 per cent of male retirees will last beyond their 72nd birthday so will spend at least seven years in retirement, and just over 10 per cent will live to 95 and will have to budget for 30 years. 

Female mortality is a little lighter than that of males, and at least 90 per cent of female retirees will last beyond their 75th birthday so will spend at least 10 years in retirement, and over 10 per cent will live to 97 and will have to budget for 32 years. 

Many retirees will have partners, and for more than 90 per cent of 65-year-old couples, at least one of the couple will survive to age 82, and for nearly 10 per cent of 65-year-old couples, one member of the couple will survive to age 99. So, there is an 80 per cent probability that the funds supporting a 65-year-old couple will need to last between 17 and 34 years.

But there are some issues with using the Australian Life Tables to estimate life expectancy. 

Among those issues are:

  1. The Life Tables reflect mortality rates that applied during the years 2015 and 2017.  But mortality rates tend to improve over time so the rates that applied in 2015 to 2017 are already slightly outdated.
  2. Further, even if the Australian Life Tables reflected current mortality rates, mortality rates typically improve over time so the actual life expectancy allowing for likely future improvement in mortality rates is higher than shown in the Life Tables.
  3. The Life Tables show average life expectancy, but life expectancy for a particular individual significantly depends on a number of factors including current health, smoking status, lifestyle, income, education, occupational factors, hazardous hobbies and so on.

You can get some idea of what factors are likely to affect your specific mortality from one of a number of websites where you can input your own personal information and the website provides an output which is an estimate of your remaining lifespan.

Two such websites are Mylongevity and Livingto100. analyses the factors affecting mortality into the following (using its “SHAPE Analyser”):

  • surroundings
  • health
  • attitude
  • parents
  • eating.

After entering your own responses to a series of questions about the above five areas, you are provided with an estimate of your life expectancy.

Livingto100 is a US website that asks questions about personal habits, lifestyle, nutritional factors, medical factors and family factors. A feature of this particular website is that it offers a list of ways in which you can increase your prospective lifespan, together with the estimated impact of each on your lifespan. However, Australians should be a little careful in interpreting the results from this website, because life expectancy in Australia is somewhat higher than in the US; for example life expectancy at age 65 in Australia is about 1.5 years longer than in in the US.

What does it mean for you financially?
Regardless of your life expectancy, you need to consider the possibility that you will live longer than the average. After all, about half of all people of a particular age will live fewer years than their life expectancy, and about half will live longer. When planning your future expenditures, many financial planners would allow for a lifespan of something like five years more than your actual current life expectancy, to reduce the probability that you live longer than you have planned for, and run out of money.

The following table shows you how much you can spend from your financial assets according to what your target timeframe is, assuming that you are happy to spend down your assets over your lifetime without worrying about leaving any particular amount of money to your beneficiaries. The table also assumes that you wish your annual expenditure to remain fixed in real (inflation-adjusted) terms so that you can maintain the same lifestyle over the whole expected term.

Affordable drawdown rates by fixed term and real interest rate

Term (years) 0% 1% 2% 3% 4% 5%
10 10.00% 10.50% 11.00% 11.60% 12.10% 12.60%
11 9.10% 9.60% 10.10% 10.60% 11.20% 11.70%
12 8.30% 8.80% 9.40% 9.90% 10.40% 11.00%
13 7.70% 8.20% 8.70% 9.30% 9.80% 10.40%
14 7.10% 7.70% 8.20% 8.70% 9.30% 9.90%
15 6.70% 7.20% 7.70% 8.30% 8.80% 9.40%
16 6.30% 6.80% 7.30% 7.80% 8.40% 9.00%
17 5.90% 6.40% 6.90% 7.50% 8.10% 8.70%
18 5.60% 6.10% 6.60% 7.20% 7.70% 8.30%
19 5.30% 5.80% 6.30% 6.90% 7.50% 8.10%
20 5.00% 5.50% 6.10% 6.60% 7.20% 7.80%
21 4.80% 5.30% 5.80% 6.40% 7.00% 7.60%
22 4.50% 5.10% 5.60% 6.20% 6.80% 7.40%
23 4.30% 4.90% 5.40% 6.00% 6.60% 7.20%
24 4.20% 4.70% 5.20% 5.80% 6.40% 7.10%
25 4.00% 4.50% 5.10% 5.70% 6.30% 6.90%
26 3.80% 4.40% 4.90% 5.50% 6.10% 6.80%
27 3.70% 4.20% 4.80% 5.40% 6.00% 6.70%
28 3.60% 4.10% 4.70% 5.30% 5.90% 6.50%
29 3.40% 4.00% 4.50% 5.10% 5.80% 6.40%
30 3.30% 3.90% 4.40% 5.00% 5.70% 6.30%
35 2.90% 3.40% 4.00% 4.60% 5.30% 6.00%
40 2.50% 3.00% 3.60% 4.30% 5.00% 5.70%
45 2.20% 2.80% 3.40% 4.00% 4.70% 5.50%
50 2.00% 2.50% 3.20% 3.80% 4.60% 5.30%

The table shows the drawdown rates by single years for the most likely retirement durations (between 10 and 30 years) but also the drawdown rates for longer retirements in five-yearly intervals.

For example, if you think that you can earn a real interest rate (after inflation) of 3 per cent per annum on your investments, and you are planning for a 35-year retirement, then you might budget on spending 4.6 per cent of your available funds at the beginning of the year.  As you get older, the term for which you need to plan will reduce, but so will your funds. If you earn exactly the real interest rate that you have assumed, then the drawdowns based on the above table would be reasonably stable for the early period of your retirement but would start to reduce noticeably as your age approaches your life expectancy.

The real rate of return that you might expect to earn should depend on your chosen asset allocation. For example, suppose you invest very conservatively in cash and term deposits. Currently, interest rates paid on cash account and term deposits are so low that it might be a struggle even to match inflation, which has typically been running at between 1%pa and 2%pa in recent years.  That suggests that with a very conservative investment approach, you might need an element of luck even to achieve a “real” interest rate of zero. If you adopted a more aggressive investment allocation then you might expect a higher real rate of return, but you would also need to accept additional risk of fluctuation in the value of your investments.

In general, the more conservative your asset allocation, the lower your expected return and therefore the lower your drawdown rate can be. On the other hand, it is true that the asset allocation with higher allocation to ‘risky’ growth assets will produce returns that are more volatile from year to year, and if you are rather comfortably funded for your retirement then a very heavy emphasis on growth assets may increase the risk that the target returns will not be achieved.

To provide an idea of what sorts of real returns may be expected from different asset allocations, here are some of the real return targets from some of Australia’s largest industry superannuation funds as at the date of writing (sourced using links from Industry Super).

Investment return targets of industry superannuation funds

Fund Investment mix Growth assets (%) Real return target (CPI + X) (%)
Australian Super      
  High growth 82 4.5
  Balanced 70 4
  Conservative balanced 50 2.5
  Stable 33 1.5
  High growth 92 3.75
  Growth 72.5 3.25
  Conservative growth 52 2.25
  Conservative 31 1.25
  High growth 90 4
  Balanced growth 75 3.5
  Conservative 39 2
  Australian shares 100 5
  International shares 100 4
  Shares plus 89 4.5
  Balanced 76 3
  Conservative balanced 54 3
  Infrastructure 60 3
  Property 30 2.5
  Capital stable  34 2.5  
  Diversified fixed interest 0 0.5
  Cash 0 0.5
  Growth 82 3.5
  Balanced 72 3
  My AutoSuper (Balanced) 72 3.3
  Conservative 26 1.25
Care Super      
  Growth 82 4
  Australian shares 100 4
  Overseas shares 100 4
  Alternative growth 70 3.5
  Balanced 70 3
  Direct property 30 3
  Conservative balanced 50 2.5
  Capital stable 35 2
  Fixed interest 0 0
  Capital guaranteed 0 0
  Cash 0 0

Generally the investment objectives are after taxes and fees. Where different objectives were quoted for multiple periods, the objective for a 10-year period is quoted in the table above. Where property, infrastructure and private equity were not specifically apportioned between ‘growth’ and ‘defensive’, 50 per cent was apportioned to growth.

Summarising the above table, it might be reasonable to assume investment targets, depending on your chosen asset allocation, in the ranges shown in the following table.

Range of superannuation fund return objectives by asset allocation

Asset allocation % growth assets  
Investment return objective (CPI + X) (%)    
High growth/shares 80-100 3.5% to 5.0%  
Balanced 60-79 3.0% to 4.0%
Conservative balanced 40-59 2.25% to 3.5%
Stable 20-39 1.25% to 3.0%
Cash/capital guaranteed 0-19 0.0% to 0.5%

Factors to take into account before you decide

Remember that if you have a partner, your funds need to survive not only for the remainder of your lifetime but also for the remainder of your partner’s lifetime. One way of addressing this would be to assume that you need to plan your spending on the assumption that your funds need to last for the longer life expectancy (out of your expectancy and your partner’s), plus five years. However, as time goes on, you would re-evaluate the remaining life expectancy, and in a few cases you would need to reduce your spending as you attain very high ages to allow for the chance that you will live even longer than your original life expectancy plus five years.

Slow and Steady is available from John De Ravin’s website for $39.95.

Have you been forensic in your life expectancy planning or are you keeping your fingers crossed?

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Written by John De Ravin


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