Longevity risk intensifying

longevity risk retirement planning

Longevity risk will play a bigger part in retirement planning as the latest government data indicates morality rates are continuing to fall.

Data from the Australian Government Actuary based on the last completed census indicates longevity risk is playing a greater part in retirement planning, emphasising the need for sound analysis before the use of these figures by advisers, a technical expert has said.

During her firm’s latest technical webinar held yesterday, Accurium SMSF technical services manager Melanie Dunn revealed mortality rates had dropped across all age groups as reflected by the 2015 to 2017 Australian Government Actuary life tables.

“Female mortality continues to be less than male mortality … at all but the oldest ages,” Dunn said.

“Interestingly and supporting this idea that we are living longer [is the statistic that] in the three years from 2015 to 2017 over 5500 people in Australia passed away aged 100 or over.

“It’s really important to consider this and help our retirees understand this when thinking about longevity risk.”

Dunn noted the average life expectancy for men and women aged 67 now stands at 18.2 year and 20.7 years respectively.

Further, the government numbers show the average life expectancy with mortality improvements for men and women aged 67 is 20.4 years and 22.5 years respectively.

“So we’re starting to get some really long time frames here and it’s important to remember these are just the average. So in fact over 50 per cent of retirees will live past these life expectancies, [meaning] one in two of your retiree [clients] potentially will live past these ages and we will need their income to last longer,” Dunn said.

She pointed out advisers had to recognise relying on the average numbers to formulate a retirement strategy means the client will only have a one in two chance of having their retirement savings see out the remainder of their lives.

“Arguably that’s a pretty high risk to take,” she said.

To mitigate the longevity risk, she recommended advisers look to cover higher mortality rates reflected in the life tables.

“[To this end] there is actually a 25 per cent chance that a male aged 67 will last to age 93 and a female to age 95,” she said.

“So if we want high confidence, [in this case] a 75 per cent confidence rate or a three in four chance, that our income will last as long as we will, we might plan for age 93 and 95.”

Dunn has previously said that specific SMSF trustee longevity calculations should be used by financial advisers, opposed to general population averages, to improve their value proposition to retirees.

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