How long are you going to live?

Planning for retirement is daunting for many people. The stakes are high, and there is lots of uncertainty around some important issues; like how long will you live? What makes this a particularly vexing issue, is that hardly anyone likes talking or thinking about death – especially their own!

So, let’s be adults and tackle this “length of life” issue head on.

How long are you expected to live?

The Australian Federal Government kindly provides updated life expectancy data for the Australian population each time it publishes its Intergenerational Report, which it last did in 2015. (“2015 Intergenerational Report – Australia in 2055”, The Treasury, The Australian Government, March 2015.)

What these tell us is that if you are currently 60 years of age, a man is expected to live another 23.8 years to 83.8 years of age and a woman is expected to live another 26.8 years to 86.8 years of age.

Similarly, if you are currently 70 years of age, a man is expected to live another 15.7 years to 85.7 years of age and a woman is expected to live another 18.1 years to 88.1 years of age. 

For how long will you be able to life the lifestyle you want to live in retirement?

The Australian Bureau of Statistics ran a survey in 2014/15 about retirement intentions and found that the average age at which persons intended to retire was 65 years. Assuming reality matches these intentions, it means if a person retires at age 65 in 2017, a man will be expected to live until age 85 and a woman to age 87 years. That’s 20 years and 22 years respectively living in retirement – which is a really long time.

And here’s the interesting part … that is just the average life expectancy; 50% of people will live beyond these ages, many into their 90s, and some (around 3-4% of the population) will live past 100 years of age.

There are a host of factors that impact how long you are likely to live. Here is a link to an AMP calculator that can give you a better estimate of your life expectancy, given your situation.

 Preparing for a long retirement

We can’t know exactly how long we will live, but there are a few things we can know.

We know that the Age Pension in 2017 (including supplements) is $23,096 per year for a single person and $34,819 for a couple. This may be enough to survive on (if you already own your home), but most people would not consider that enough to thrive on. If you don’t own your own home, and don’t have much in the way of retirement savings, please be really nice to your family, as you will probably need them later on.

Moreover, eligibility to receive the Age Pension is already income and assets tested, and given Australia’s aging population, the Federal Government is over time more likely to tighten the eligibility criteria and the level of the Age Pension than it is to be more generous and loosen them.

We also know that based on current life expectancy, you have a 50% chance of living into your mid/late 80s, which is 20-25 years in retirement. And you may well live beyond this average age and therefore will want to stretch your ability to generate additional income in retirement out to 35+ years.

 So, what actions can you take to make a difference to your lifestyle in retirement?

There are only so many ways to build up that retirement nest egg to provide you with a higher and more sustainable income in retirement. Here’s a few ideas:

Before you retire:

• Save more: Spend less and save more. Making voluntary concessional and/or non concessional superannuation contributions are not the only ways to save, but they one of the few tax advantaged ways of saving;
• Work longer: By doing so you will earn more income, make more superannuation contributions and give your retirement savings more time to grow before you start drawing down on them. This might not mean working full time for longer, but perhaps transitioning from full time work to part time work and then eventually into full retirement;
• Invest wisely: This is easier said than done. Depending on your time horizon and/or risk appetite, you might choose to invest more conservatively or more aggressively than you do currently. Remember though that there is an inherent link between risk and return, so if you do choose to invest more aggressively in search of higher returns, you will very likely experience a more volatile/uncertain ride – this could be good, or not good and you can’t know for sure in advance;
• Lower your cost of saving: For most people, the investment returns they get are after fees, so if you can lower your fees without sacrificing your the integrity of your investment strategy, you might be able to eek out a bit better return. In particular, if you inadvertently have multiple superannuation accounts, consider consolidating them to reduce fees; and
• Get advice: Preparing for retirement can be complicated – there are, literally, hundreds of pages of government legislation around retiring, and thousands of pages of guidance notes, advice, etc. One of the big value adds of financial advisors is understanding these rules and regulations and navigating them with you. The decade or two prior to your retirement is an excellent time to engage a qualified financial planner to chart the course of your retirement.

When you retire:

• Modify your lifestyle expectations to match your means: You might find that when you get to the point of retiring you have more or less assets than you expected. You should consider modifying your lifestyle expectations to match your means; and
• Diversify your sources of income: If you got involved with the process of accumulating your superannuation savings, you would have been told time and again to diversify. Well, diversification still matters in retirement (maybe it matters even more). But now you should not only think about diversification in terms of how you are invested, but also about having a diversity of income sources. For example, you might draw an income partly from the Age Pension, partly from an Account Based Pension account, and partly from an Annuity product.

 Step up and plan

While preparing for retirement and discussing your own mortality may not be everyone’s idea of fun BBQ conversation, these are important issues to grapple with. And the earlier you do this, the more time and opportunity you will have to develop a plan that makes a difference to the level and sustainability of your lifestyle in retirement.

If you’ve been avoiding planning your retirement, for the sake of you & your family, avoid it no longer!

Read more at the BigFuture website.