Longevity, the uncertainty and managing the risks
A key to any plan is knowing how long the plan is needed. For retirement, the plan is often based on life expectancy, which has been steadily increasing over the past 100 years. While the concept of life expectancy appears simple enough, some common misunderstandings can create problems for financial advisers and their clients.
Today’s retirees are now typically living into their late 80s; 10 years longer than they did in the 1990s. In 2020, the most common age of death in Australia was 89. When compulsory super started in 1992, it was only 78.
Until very recently, the age of 85 was a convenient estimation of a typical lifespan. Many financial models just assumed that everyone lived to 85. Not only was this factually wrong, but it was based on only a 50% probability of being correct. How many retirees would be happy to learn that their retirement plan only had a 50% chance of success?
The Australian Bureau of Statistics (ABS) estimates that the life expectancy of an Australian male is 81.2 years and 85.3 years for a female. While correct, these figures are estimates of life expectancies from birth, so they include the deaths of people who die young from accidents or illness. For that reason, they are misleading to use for retiree life expectancy. Having reached 65 or 66, you have a higher life expectancy because you are already a survivor.
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