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Confidence, not life expectancy, most important for retirement: Optimum
As the retirement product race heats up in superannuation, funds and advisers need to confront a simple fact: people will live a lot longer than they think.
Average life expectancy remains the main metric for determining the planning horizons for retirees. But research from the Actuaries Institute of Australia found that the tools used by advisers to determine life expectancy may “dramatically understate” the reality for many clients. The life expectancy figures advisers use from the Australian Government Actuary’s Australia Life Tables (ALT) are static, and do not include improvement factors; in reality, retiree mortality rates have been steadily reducing since 1891, when the ALT was first developed, and are expected to keep doing so.
“For anyone, the current rate of mortality at each future age is predicted to reduce significantly by the time someone today reaches that age,” writes David Orford, managing director of Optimum Pensions. “For example, using the Government Actuary’s 25-year improvement factors, by the time a current 65-year-old reaches age 75 the mortality rate for a 75-year-old male will be around 40 per cent less than it was when the tables were produced.”
A financial plan devised on the basis of current life expectancy then risks the retiree falling back on the Age Pension – less than a ‘modest’ standard of living according to the Association of Superannuation Funds of Australia Retirement Standard.
Orford and Optimum believe a new way of thinking about retirement is required: the “degree of confidence” retirees want to have about how long their retirement plan will last them. Optimum’s Lifespan Calculator allows retirees to estimate their personal life expectancy based on health and other factors, but also to select how confident they want to be that their retirement plan will last the rest of their lives.
More than half of respondents to the question of “How confident do you want to be that your retirement plan can last as long as you live?” selected a confidence level of 95 per cent. But the lump sum required for a couple at age 67 to provide a $25,000 income per annum – which increases with inflation – while having a 95 per cent confidence level is $553,000, requiring almost 20 per cent more superannuation at retirement than a couple who is satisfied with being 50 per cent confident.
“One alternative solution to having to save much larger amounts for retirement is to buy an efficient and effective lifetime income stream that guarantees continued income no matter how long either spouse lives,” the report says. “The cost of such an income for this 67-year-old couple would be approximately $497,000 based on pricing for an investment-linked annuity and using the same return and inflation assumptions.”
“Reinsured longevity risk might be the answer – the crystal ball and missing ingredient in the retirement planning landscape. Lifetime income products use pooling through reinsurance to share the longevity risk and as a result, less funds are needed to ensure the security of each person’s retirement income until the end of their days. This grants peace of mind to cover the cost of anything unexpected and most importantly, the opportunity to enjoy a fulfilled and comfortable retirement.”
