Money
5 things to know about life expectancy to make the most of your money (and time)
Life is a marathon, not a sprint. So how long will your marathon last? That’s the million dollar question, at least for people planning their post-work life retirement finances. Alex Brooks explains what ‘longevity risk’ is, and how you can best determine yours.
By Alex Brooks
Money matters, but time matters more. No amount of money can buy more time.
When you want to stop trading your time for a salary, you have to get real about your personal ‘longevity risk’ – a concept that very smart maths people known as actuaries can help unpack and explain.
Citro asked actuary Stephen Huppert – the author of an abundance of expert reports like Retirement Matters, The Fear of Running Out, The Missing Piece: Longevity Awareness and Longevity Risk: The mother of all retirement risks – what everyday people should know about their longevity to plan the best retirement for them.
Longevity risk planning tip 1: it’s personal to your beliefs, health and lifestyle
Many people blindly believe we should plan our retirement finances around ‘life expectancy’. But that’s not a particularly - or statistically - robust approach, according to actuaries.
Only around 5% of people die at the age of life expectancy, which means 95% of us have to come to terms with our ‘longevity risk’ and what that means for our finances.
Longevity risk means staring down the following problem:
- The risk you’ll outlive your retirement savings or investments.
- The risk you will underspend your savings and not enjoy the time you have to the fullest.
Are you more ‘heck, let’s blow it all and have fun’ or more cautious about avoiding any reliance on Australia’s Age Pension?
These questions are deeply personal - what’s right for one person isn’t right for another. Read more on 11 ways to make your retirement income last as long as you do.
Longevity risk planning tip 2: online longevity calculators are a mixed bag - use them wisely
Doing a Google search for ‘longevity calculator’ or ‘lifespan calculator’ throws up a bunch of sponsored ads and legitimate tools to help you predict how long you might live.
But are these calculators actually helpful? Yes and no.
Beware of ‘fountain of youth’ calculators that promise to predict how long you will live while trying to sell you expensive supplements, diets or exercise regimes like standing on one leg.
Every online calculator uses different assumptions so read the ‘about’ section on the calculator’s website before wasting 20 minutes answering questions that don’t give the answers you need.
Stephen was also involved in designing the Optimum Pensions lifespan calculator that offers a general prediction of lifespan as well as a more detailed estimate based on some health questions.
He says the Australian My Longevity calculator by David Williams is another simple tool for people planning to understand their longevity for financial purposes.
Stephen also liked the look of the way the Retirement Income Simulator tool explained lifespan risk in relation to super balances and Age Pension outcomes. Read more on Citro about how the Retirement Income Simulator works.
“It’s important to know that thinking about our future lifespan and healthspan is separate to financial planning. Good retirement planning that considers, both together gives the best long term outcomes,” he says.
Personal financial advice is usually the best way to work out how to balance your longevity and financial risks.
It’s vital to ask your financial planner or advisor what assumptions they are using for longevity and lifespan.
“Financial advisers should at least use the latest life tables with an adjustment for improvements (see point 3),” he says.
“The other thing to ask your planner is whether they are basing their plan on average or longer than average lifespans.”
Longevity risk planning tip 3: understanding the ‘Australian Life Tables’
The very first Australian Life Table found that a baby born in the colony of New South Wales way back in 1867 could expect to live to 45.6 years.
Today, the Australian Government Actuary publishes the Australian Life Tables every 5 years, and a boy born in 2022 can expect to live to 81.2 and a girl to 85.3.
Like tax rates or winning the lottery, Life Table numbers matter only as they specifically apply to you.
These Australian Life Tables tend to give you a lower figure than is realistic because they include people born with serious health conditions that reduced their life expectancy.
People who reach retirement age in reasonable health have a life expectancy that's greater than average.
So while these tables offer a helpful guide, it’s important to understand their limitations, according to Stephen.
- Life Tables are based on historic data from the Census, so capture past trends rather than future trends.
- Life Tables rely on averages, which creates a ‘fallacy of averages’ that can be misleading when variables like health, genetics and education are factored in.
New Australian Life Tables will be published in December 2024.
Longevity risk planning tip 4: geek out on mortality factors
Life expectancy changes over the course of your life because as you survive birth, adolescence (remember all that risk-taking?) and middle age, your chance of reaching an even older age increases.
This life expectancy at different ages can be presented as the number of additional years a person can expect to live.
There are also changes to the way we live (we don’t advertise cigarettes on television anymore, for example) and medical advances that happen over time that also have an impact on the geeky maths behind ‘mortality factor improvements’.
So if you look at the most recent Australian Life Tables number on period life expectancies for people aged 65 in 2030, you can see how these mortality factors change the outcomes over time.
Projected period life expectancies at age› 65 (with 25-year mortality improvement factors)
Bottom line: mortality factor improvements help us get closer to guesstimating how long we might live.
Longevity risk planning tip 5: improved longevity literacy lifts happiness in retirement
The dream of retirement and not working seems alluring but the reality of being disconnected from workplaces and friends isn’t always good for your health.
Stephen says new research reveals a positive correlation between ‘longevity literacy’ and happy outcomes in retirement.
In other words, the more we think about how long we want to live and make proactive steps to plan, the better off we are. That is, longevity planning, not just retirement planning.
“The question shouldn’t be ‘what’s my life expectancy’, it should be ‘how long can I expect my retirement to last’,” he says.
He likens retirement and longevity planning to being in the Tour de France bicycle race.
“Going up the mountain is about putting your bum down and pedalling hard to the top,” he says, explaining this is what we do as we work and accumulate our superannuation or savings.
“But just like the Tour de France, the accidents occur coming down the mountain.”
Before retirement, people want to know “Do I have enough to retire on?”
After financial retirement, people want to know “How much can I spend to maximise my lifestyle?” And they definitely don’t want to crash on the way down.
Read this next:
A Citro guide: 10 lifestyle swaps for longevity
A Citro guide: Vital checks to have in your 50s and 60s
A Citro guide: Australia’s top 30 retirement locations
Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.