Life Expectancy: Will You Outlive Your Retirement Savings?

As we approach the end of financial year, it is a very relevant time to be having a look at our goals and seeing how we are planned/set up for retirement.

As people are leaving work earlier and living longer, this is a very important planning session to have!

The risk of outliving your retirement savings is also known as ‘longevity risk’. Now that super funds, fund managers and other financial service providers have survived the GFC (although the recent volatility on world sharemarkets remains a distraction), a lingering issue concerning the super industry is ‘adequacy’ (or lack of ‘adequacy’), that is, the worry that Australians will indeed outlive their retirement savings.

The longer you live, the greater your life expectancy becomes. At age 55 years, a female can expect to live to 86.02 years on average, while a 70 year-old female can expect to live to 87.80 years – nearly an extra two years. At age 87, a female can expect to live to 93.11 years – an extra 5 years in life expectancy from what a woman can expect at age 70, and an extra 7 years in life expectancy from what a woman can expect at age 55.

Crunching the numbers: a $1 million retirement (7% and 5% returns).

According to ASFA, you can live a modest life in retirement on around $34,560 a year as a couple, and a comfortable life on nearly $60,000 a year, and the lump sums you need for this type of income is nowhere near $1 million, when you take into account the Age Pension.

For example, assuming Age Pension age is 65 years, a couple can secure a modest lifestyle with hardly any private savings, because the FULL Age Pension for a couple is now $34,382 (applicable until 19 March 2017). Without the Age Pension, a couple would need a lump sum of $530,000 to deliver the equivalent annual retirement income of $34,382 (assuming retirement assets are generating a 7% return), or $800,000 (if retirement assets are generating a 3% return).

Not very attractive isn't it, when many of us don't have anywhere near that amount in super!

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Troy Gunasekera // National Manager