This blog’s by my friend Jim Hennington, an Australian actuary who translates charts into simple messages.
Jim Hennington – Aussie actuary
If you are interested in the delivery of investment solutions that the Australians are devising to meet this issue, then click on the link at the bottom of the article.
Here’s why NOBODY’S retirement plan / product should be built around “average life expectancy” figures.
This chart takes 10,000 65-year-old couples and projects how long they’ll live using the Australian Life Tables[1]. The horizontal axis is the age different households will live to (based on the longest surviving spouse of each couple). The black line shows how many of them live to that age (i.e. the longer living spouse passes away).
You can see there is a huge range for how long different retired households live. As individuals, we just don’t know where we will land on this chart. You could get hit by a bus, of you could live to the end of the life tables (age 109). Both are possible – it’s subject to randomness.
While actuaries like me can project what will happen for a GROUP of lives, we can’t name WHO will live to each age.
For individuals, the key thing is to consider how confident you need to be that you won’t outlive your retirement plan / product. The colouring in the chart shows what planning age to use to be either 50%, 75% or 90% confident that your planning age will cover how long you might live.
To be, say, 75% sure your plan / product will cover both lifespans for you and your spouse, it needs to last until age 98. If you’re happy to have a 50/50 chance that one spouse will outlive the plan, then planning to age 94 gives this probability. To be 90% sure, the average couple entering retirement needs their money to last to age 101 !
This has a profound impact on those building retirement products and retirement plans. It impacts how much you can safely draw each year from your super in retirement !! This is why the government has been pushing super funds for a decade to introduce ‘lifetime’ products – that absorb this uncertainty for you.
For example see this SuperGuide article https://lnkd.in/g9EKsCj. Five providers have launched new style products so far and most super funds are planning to improve their offerings.
1] ALT 2015-17 using the 25-year improvement rates and looking at joint-life projections.
It is not clear how relevant this is to most people in the UK. As people get older, there are often health conditions that will limit what they can do or want to do. Health costs are generally paid for by the NHS and there will normally be the state pension coming in. There are also various state benefits, not all of which are means tested. Unless you want to leave money to be inherited, you may only need your money to last whilst you are fit and healthy. Quite a number of people get worried that they won’t be in a state to spend their pension money if they leave it too long.