Understanding the role life expectancy plays is important in advice.

Understanding how long our SMSF members might live is important when advising them on how to manage their super in retirement and into old age.

That was a key theme of a paper delivered at the SMSF Professionals’ Association of Australia (SPAA) 10^th conference in Brisbane by Peter Crump, Executive Director, ipac SA, and Meg Heffron of Heffron SMSF Solutions.

Their paper, “Pensions – self managing your deferred annuity“, looked at the new risks for SMSFs that are inherent in people living longer, with a focus on how it can be managed in a self managed super fund.

Crump and Heffron told the delegates: “Taking the risk of living well past life expectancy – what we call longevity risk – into account will help understand how much money is needed in retirement

“Keeping track of how much money needs to be set aside for advanced age (typically assumed to be aged 85 plus) needs some simple calculations based on retirement factors.”

They said there were a number of ways of keeping track of how much you have for this advanced age, including keeping separate member accounts in the fund, or just paper records.

“There are simple processes available for accounting for the ‘longevity account’ in a SMSF, and, if people decide to use external solutions they must realise they come with risks.”

“It’s an important conversation for SMSF specialists to have with their clients to ensure they take control of their retirement, and maintain a good lifestyle without lapsing into age pension mode. Certainly the role of trustee education is this area should be under-estimated; how much do I need if I live well beyond life expectancy and how well.

“The other obvious benefit is that this places less strain in the public retirement system,” Crump and Heffron said.

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Australians need to plan for longer retirement.

The Actuaries Institute (the Institute) warns Australians need to be financially prepared for many years of retirement. The warning comes in response to the latest headline life expectancy rates released last week by the Australian Bureau of Statistics (ABS), which projected ‘life expectancy at birth’ age for men of 79.9 and 84.3 for women. (ABS media release can be found here).

According to the Institute, these ‘reported’ life expectancies focus on reported life expectancies at birth, but those that have already reached age 65 can expect to live longer than the population average and allowing for improvements in longevity will increase this further. The Institute’s own calculations suggest that it is, in fact, more likely that the life expectancy of those aged 65 now will be 86 for men and 89 for women.

This means that 65 year old males need to fund on average 21 years of retirement, and 65 year old females will need to fund on average 24 years of retirement.  And, as these are average figures, some people will live much longer.  In fact, the Actuaries estimate that one in three 65 years olds will live past 90 and one in five will live past 95.

“Most people don’t realise how long they might live. Understandably many people base their retirement plans on the published life expectancies. However in reality, with rapid advances in medicine and the dramatic improvement in life expectancy, it is quite conceivable that in the coming years half of all healthy 65 year olds will live past 100,” said Mr John Newman, President of the Actuaries Institute.

It is important that retirees consider whether their savings will fund these lengthy retirement periods.  Those relying purely on ABS averages are likely to run out of money, meaning that they may face a significant portion of their retirement years in an uncomfortable financial situation.

Actuaries making headway in longevity debate but still more work to do

The Institute has been vocal on the issue of longevity risk (the risk of people outliving their retirement savings) for some time. In September 2012 the Institute released the white paper “Australia’s Longevity Tsunami, what should we do?” which emphasised the need for urgent retirement policy reform in the face of Australia’s steep and continuing rise in life expectancies.

Since the launch of the paper and subsequent government consultations, the Institute has welcomed changes announced in the May 2013 federal budget, which removed the inequitable tax treatment of deferred lifetime annuities and allowed them the same tax treatment as current income streams.

“We’ve made an important step in placing the urgent issue of longevity risk firmly on the agenda. We are focused on improving education on this issue, to ensure future generations have a better a chance of planning for their retirement adequately, and we also strongly recommend lifting the pension age, in line with increases in life expectancies” Mr Newman concluded.

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