Many of us think about market risk when planning for retirement, but how much do we know about longevity risk? Arguably more confronting than market risk, it's generally less understood.
According to the Australian Bureau of Statistics, Australian life expectancy is ranked among the highest in the world. Life expectancy at birth for Australian males and females is the joint fourth highest and joint third highest in the world respectively.
All of this adds up to a high longevity risk for Australians planning for retirement.
A male currently aged 65 can expect to live a further 19 years and female a further 22 years.
Even if markets remain relatively stable, you may consume all your assets before your life is over. Matching the rate of consumption of your assets to the duration of your lifetime is tricky. Many of us will run out of money first.
Considering how long we will live is critical for planning our retirement. However, if we plan based on life expectancy, we'll be wrong one way or the other almost all the time. By definition, half of us will stay around longer than average.
Rather than planning to reach your life expectancy, you should plan to survive beyond it. One reason is that, for a couple planning retirement, the probability that either one lives past average life expectancy increases to 75 per cent.
In fact, there is a one-in-three chance that one will live to 95, and a one-in-ten chance that one will live to 100.1 but the problem is, most of us aren't planning to live to 100, or worrying about how to fund it if we do.
There is one area our clients should start reviewing now.
The Government's Moneysmart Website provides a great Calculator to see how much Super you think you will have as opposed to how much you will need:
If you would like to review your Super and retirement plans please contact us.