Living Longer: How to future-proof your retirement income

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Living Longer: How to future-proof your retirement income

With more Australians living well into their 80s and beyond, managing your longevity risk is more important than ever. Learn how income products like annuities can support your lifestyle for the long haul – no matter how long your retirement lasts.

In many ways, living longer is a nice problem to have. Life expectancy in Australia now exceeds 81 years for men and 85 years for women. Yet, behind these averages, there are huge differences in how long people actually live. In 2023, the median age at death was 79.6 years for males and 84.6 years for females. Yet half of the people who died that year were older, with many much older (see Figure 1). So, if you were working towards your money lasting to age 79.6 as a man or age 84.6 as woman, then you’d have a 50% chance of outliving your money.

That’s why a ‘one size fits all’ approach to retirement planning doesn’t work. As medical innovations continue to extend our years, factoring in the age that your parents died may not be a good indicator of your own life expectancy.

One of the biggest fears many retirees have is that they will outlive their money. This fear results in many retirees drawing down no more than the compulsory minimum from their account-based allocated pension. The risk here is that retirees may later regret being so frugal and they may pass away with a relatively large fund balance – savings that could have made their retirement much more enjoyable and comfortable.

FIGURE 1

Hedging your bets against longevity risk

The good news is that a range of financial products have been designed to help retirees spend their savings with confidence while also protecting against longevity risk. Here are some of the options available.

1. Lifetime annuities

Immediate lifetime annuities provide a regular income stream that’s guaranteed for life – regardless of investment returns, or how long you live. Both the investment risk and the longev- ity risk are transferred to the investment manager.

2. Deferred lifetime annuities

Unlike immediate annuities, which begin payments straight away, deferred annuities pay an income from a future date, such as age 80. A deferred annuity can protect against late-life income shortfalls enabling retirees to enjoy spending retirement savings now, knowing that guaranteed income kicks in later.6

3. Investment-linked annuities

Investment-linked annuities, or market linked lifetime income streams, combine guaranteed lifetime payments with exposure to investment market performance. Investment-linked lifetime annuities may appeal to those comfortable with investment risk and who seek potentially larger payments than a lifetime annuity.7

4. Allocated pensions

An allocated pension, also known as an account-based pension, offers investment choice, the flexibility of being able to withdraw lump sums, and a regular income. The flexibility of allocated pensions makes them a cornerstone of many retirement strategies.

The right income strategy depends on personal circumstances

Today’s retirees generally have a mix of needs, including the desire to spend their retirement savings without the fear of running out of money. Easy access to capital for lumpy expenses (such as overseas holidays or emergencies) is another common need – as is the ability to choose how their savings are invested. Finally, many retirees want a regular income for the rest of their lives and the ability to leave a bequest for their children. When multiple needs are in play, a combination of retirement products may be the best way to meet them. An account-based allocated pension could be the repository for ready- to-access capital that can be invested as the retiree chooses.

And an annuity could be set up to manage longevity risk. Indeed, multiple annuities may be used to manage shorter- term and longer-term income needs.

Retirement with clarity and confidence.

Talk to us to help to balance your spending today while also protecting against your longevity risk, talk to us.