Fatal flaw in retirement planning

Australians are severely underestimating how much money they’ll need for how long they will live, says the Actuaries Institute, which claims longevity tables need to be reviewed.

“The tables have a material impact on the way retirement income strategies and products are evaluated, and currently underestimate longevity,” said the Actuaries Institute.

It said in a research note to financial planners: “To have more than a coin-toss chance that a person’s retirement planning horizon is sufficient, you need to look at the timeframe that gives 80 per cent or more certainty of being sufficient.”

The institute claimed that a couple consisting of a male aged 65 and a female 62, would need a plan that lasts until the male is 100, so that they can be 80 per cent sure their financial plan meets their potential lifespan.

“That is 16 years longer than if the adviser used the simple look-up table for a 65-year-old male,” it said.


Actuaries Institute president Nicolette Rubinsztein praised the government’s commitment to improving retirement income products but decried the tools that it and financial advisers use to assess life expectancy. She said that today’s basic lookup tables do not reflect the rapid and consistent increases in Australian lifespans, and using them will negatively affect retirement income strategies.

“Life expectancy calculations are often required in the superannuation and financial planning industries,” said Ms Rubinsztein.

“They have a material impact on the way retirement income strategies and products are evaluated. A healthy, well-educated female entering retirement today, who had an affluent career and enjoys a good quality of housing, is just as likely to live beyond age 100 as she is to die before age 80.”

The current tables overlook factors that affect longevity, such as improvements in medical research, living standards, nutrition and lifestyle, education, occupation, genetics and wealth.

Research note author Jim Hennington states said that if an adviser group has 1000 healthy, educated, professional 65-year-old couples as clients, it could expect more than half of these households to still have one spouse alive at age 95.

“The basic look-up tables used in legislative instruments and financial planning tools used by advisers don’t allow for this critical planning issue,” he wrote.

“Clients need significantly different advice and strategic investments than if their life expectancy was assumed to be age 84 or 87.”

The note also highlighted that any uncertainty in how long a person will live will also affect other aspects of retirement planning.

Do you think current longevity assessments are correct? Are you worried that you’ll outlive your retirement savings? Should longevity tables be reassessed annually?

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Written by Leon Della Bosca

Publisher of YourLifeChoices – Australia's most-trusted and longest-running retirement website. A trusted voice on Australia's retirement landscape, including retirement income and planning, government entitlements, lifestyle and news and information relevant to Australians over 50. Leon has worked in publishing for more than 25 years and is also a travel writer and editor, graphic designer and photographer.

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