The pros and cons of not having a crystal ball

There may be things we wouldn’t want to know, but it would help retirement planning.

The pros and cons of not having a crystal ball

They had been dubbed the ‘golden years’, but for an increasing number of Australia’s retirees, the lustre is dulling.

Treasury’s Retirement Income Review is assessing the state of the system and what needs attention – with the help of hundreds of submissions from learned and authoritative bodies, including YourLifeChoices. But one element over which the government has no control is Australians’ increased longevity. 

We’re living longer and that life needs to be financed. Nest eggs need to be bigger and/or the Age Pension needs to offer a better standard of living than it does now.

Baby boomers are responsible for a rapidly ageing population. By 2055, the number of Australians aged 65 and over will have more than doubled, according to the Department of the Treasury.

And the Australian Government Actuary (AGA) tells us that if you are a 65-year-old male today, you can expect to live to 84.9; if you are a 65-year-old female, you can expect to live to 87.6. That’s another 19.9 years for a 65-year-old man today and another 22.6 years for a 65-year-old woman.

Extended projections do not end there. The AGA says that half of today’s 65-year-old males will live to at least 88 and half of today’s 65-year-old women to 90. And the longer we live, the longer we can expect to live. For example, a 90-year-old male today can, on average, expect to live to 94, and a female to 95.

Increased longevity can be attributed to medical advances, better healthcare and medicines, and improved education about our health. This means that we can lead more active and engaged lives for longer, assuming reasonable health.

But this is where the good news becomes a little concerning for some.

Australians have a record $2.7 trillion in superannuation. The Australian Prudential Regulation Authority (APRA) says superannuation funds paid out $76 billion in retirement benefits in the 2019 financial year compared to only $50 billion in 2013. And as retiree numbers continue to increase, this growth rate is likely to continue.

Retirement trap No.1
But many older Australians face the prospect of outliving their retirement savings and, according to YourLifeChoices research, find planning for the cost of aged care an unpopular pastime.

The difficulty in gauging our life expectancy is complicated by the fact that many financial advisers and planners are using longevity tables – actuarial measures that assess the financial risks of a long life – that should be amended to better reflect our longer lives.

Actuaries Institute fellow Jim Hennington says the tables are used as the foundation for a lot of financial advice software, but recent research shows they too often use the average life expectancy as the basis for their modelling.

“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 says.

“And about a third of retirees, once they hit 80 years old, do outlive their savings.”

Mr Hennington says the models used to work out how much money retirees can afford to spend should set their age expectations much higher.

He says a healthy couple made up of a 65-year-old man and a 62-year-old woman 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.

Retirement trap No.2
Dr Yuanyuan Gu, a senior research fellow at the Centre for the Health Economy at the Macquarie Business School, is another who says that longevity is heaping pressure on both retirees and society to finance retirement needs.

Dr Gu collaborated on retirement income research with Dr Barbara Chambers from Monash Business School, Associate Professor Ruth Walker from Flinders University and Dr Jun Feng from the ARC Centre of Excellence in Population Ageing Research.

Their paper, The Silver Tsunami: An Enquiry into the Financial Needs, Preferences and Behaviours of Retirees, examined retirees’ funding and spending, and the interaction between health status and financial planning for retirement.

The paper says uncertainty drives retirees to seek protection from various risks, such as investment and longevity risks, but that a widespread fear of missing out (FOMO) “substantially reduces retirees’ desire for risk protection”.

Dr Gu says: “Retirees greatly value leisure and actively maintain their health, but often miss opportunities to financially plan for future health and aged care needs.

“In addition to ‘essential’ household expenses, lifestyle expenditures form a critical part of the household budget.

“The transition from work to retirement means retirees have more time to participate in other activities but lose wage income. The transition often leads to changes in expenditures and trade-offs. Some participants were concerned about the changes they needed to make to reduce spending when they retired.”

Dr Gu says that many retirees believed prevention was more important than allocating resources for health-related needs in later years.

“Rather than keep money aside for changes in health or independence, they feel the need to focus on maintaining their health and vitality while they can,” he says.

“Instead of planning ahead for increased health costs, participants focus on an active lifestyle and healthy foods to maintain health.”

And while that philosophy is sound, it still leaves many retirees anxious that they will run out of money.

In YourLifeChoices’ Ensuring Financial Security in Retirement Survey 2019, 91 per cent of 3380 respondents said it was either very important or important that their income in retirement was guaranteed to last as long as they did. However, only 22 per cent said they were confident they could maintain their existing lifestyle to “average” life expectancy or beyond.

The Silver Tsunami paper found most participants acknowledged that they needed to stretch income because of concerns about how long they would live, but had difficulty calculating safe spending.

“Participants expect health spending to increase as retirement progresses but total spending to remain constant. Rather than plan for increased healthcare costs that result from frailty and infirmity in later retirement, participants would reduce other expenditures to meet increased healthcare expenses.”

The challenge for the government and for the individual is how to offset a reliance on government support and convert retirement savings into an adequate and sustainable income. It is an ongoing challenge.

Are you guilty of underestimating your life expectancy?

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    Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.


    To make a comment, please register or login
    19th Apr 2020
    I laugh at these extreme views particularly expressed by those in the so called retirement industry, that is the one's who tell you that you need to either invest with them, or that you NEED their advice, both of whom shall undertake such an action for a fee.

    For a start, prior to the start of the Superannuation Guarantee, very few employees had any superannuation.
    It is now at the stage where the majority of people reaching retirement age now have been benefitting from the SG for at least 50% of their working life. By the quoted 2055 all employee's shall have had SG for their entire working life.
    As a consequence there should be a reduction in those who will qualify for a full pension and as such less of a drain on the public purse.

    I would have been much better if the SG funds had been paid into the Future Fund to help benefit all Australian's instead of the Fat cat's of the Investment and Insurance Industry, and the Industry funds subsiding Unions.
    Horace Cope
    21st May 2020
    Your suggestion, 45er, of using the Future Fund has a lot of merit. It's the first time I have seen this suggestion and my initial thoughts are of the savings of remuneration to board members and staff who administer the individual funds.
    21st May 2020
    id like to know if im going to survive cancer , if i will get affordable housing , as a carer i and those like me dont have any retirement , financially or otherwise and will my disabled daughter ever find the support she needs

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