Age gracefully and plan for very long retirement
The Australian
12:00AM July 26, 2016
Wealth columnist
Anyone in their forties and fifties should be financially planning to live well into their nineties … anyone younger than 40 should be assuming they will live beyond 100.
Does this sound fanciful?
Every new government report shows that Australians are living longer. As an investor it will be well worth understanding the key developments in this area of so-called longevity risk.
To put this into some perspective consider the following.
• The 1881/90 Australian Life Tables said that on average more than 115 out of 100 000 baby girls would die before reaching their first birthday.
• The 2010/12 life tables show that the average is now just three deaths for every 100 000 little girls in this age group.
This is a remarkable and wonderful 97 per cent reduction in infant mortality.
Through most ages the rate at which women are dying has continually declined.
For example, in 1881/90, over 124 females in every 100 000 aged 80 died.
Today the figure is just over 33 deaths for 100 000 women of the same age.
On average over this 130 year period, female mortality has fallen by an average of more than 80 per cent across all ages.
Males have also experienced falls in the mortality rate across all ages, but it has not been as impressive as what women have experienced.
For both sexes there have been some occasions when the rate that the population is expected to die actually increased from one set of life tables to the next.
Surprisingly, these increases don’t appear to have occurred when a large number of people died during conflicts — such as the world wars.
Couples live longer
But the story doesn’t end here. Couples actually live longer than single people.
The latest life tables (2010/12) say that on average a single male currently aged 65 can expect to live another 21.79 years or roughly to age 87.
A female of the same age is expected to live on average to age 89 — that is a 50 per cent chance of living to that age.
Accurium, an actuarial firm, has developed a calculator, using Australian life table data, for ‘‘joint lives’’ which estimates one or both of a couple surviving to a particular age.
If we look at a male and female couple both aged 65 then Accurium thinks that the chance of both of them living to age 89 — the female average life expectancy — is 27 per cent but the chances of one off them surviving is 77 per cent, if we assume the improvements in life expectancies over the last 25 years continue into the future.
If we ignore the recent improvements in life expectancies, then the chances of one of our couple surviving to age 89 declines to 68 per cent, which is still a high probability.
Let’s look at another case — a male and female couple currently aged 30. At present there is about an 87 per cent chance that one of them will be alive at age 90, assuming the recent increases in life expectancies continue for the next 60 years and a 40 per cent chance that both will be alive at that age.
Retirement goes on
What is clear from this life expectancy data is that we all have good prospects of a long life. It seems plain common sense to me to plan for the longest likely outcome. For those aged in their sixties, assuming survival to age 90 seems sensible. In other words, as I said at the start, if you are in your forties or fifties you should be financially planning to live well into your nineties. If you are younger than 40 you should assume that you will live beyond 100.
In reality anyone younger than 70 will be investing for more than 20 years, which makes them a long-term investor. For many people this reality should change how they invest their retirement nest egg.
If the age pension age remains at age 67 then those in their early fifties or younger could find themselves retired for more than 30 years, which is a long time for future working taxpayers to be funding these payments.
Tony Negline is author of The Essential SMSF Guide 2016-16 published by Thomson Reuters.
