A superannuation specialist has warned advisers and accountants against relying too heavily on Australian Bureau of Statistics median life expectancy tables as a tool to manage a client’s longevity risk due to inherent flaws associated with the data.
Institute of Financial Professionals Australia (IFPA) head of superannuation and financial services Natasha Panagis firstly alerted practitioners to the fact the tables are not confined to retirement savings in the assumptions used.
“These median life expectancy tables, like most retirement planning calculators, are based on the assumption that you are going to run your capital down during your lifetime and they also assume that you’re going to be relying on government welfare as well because two-thirds of Australian retirees do when they run out of money,” Panagis told attendees of an IFPA technical webinar held today.
She also noted the nature of the statistics contained in the tables themselves needed recognition to determine how reliable a planning tool they can be.
“There is a 50 per cent chance that clients will live longer than the median [age predicted]. The median is just the middle point so half [of the population] are expected to live longer than the median,” she said.
“Some people will die sooner than others and half will live longer than the median life expectancy [expected].”
To this end, she suggested placing too much reliance on these tables to manage a client’s longevity risk will open up a 50 per cent possibility the retirement investment plan formulated for this purpose will likely fail.
“That’s too high for comfort so it might be worthwhile building in a slightly longer period of time, beyond the median life [expectancy] tables, to provide [more] security,” she said.
“Once we [go beyond the expected age predicted by these tables], there is no real chance to work longer or save more money. It’s all about what we do now to help us get there.”
