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Life Expectancy: the Key Factor in Retirement Planning

Although we call it financial planning, a great part of what we do is retirement planning for our clients in the Perth area. If the recent Financial Services Inquiry (FSI) report is any indication, it will be even more important for every Australian to hire a financial planner at some time during the process of preparing for retirement.

Life Expectancy - Key Factor in Retirement Planning

While an increase in life expectancy is obviously seen as a very good development for most people, it has one major downside. Your retirement income has to last longer than it would with a shorter life expectancy.

The real surprise in the report is that Australians tend to underestimate their life expectancy by an average of seven years. Those who are 65 years of age and retiring can now have a reasonable expectation of living to be 90 years of age. One out of ten females who live to be 65 will live to be at least 100 according to the Australian Bureau of Statistics’ (ABS) Australian Life Tables (ALTs).

The Pitfalls of Retirement

If it were just a straight mathematical equation, it would be easy to figure out how much money each individual would need for retirement to sustain their preferred lifestyle. However, there are many factors that go into what will happen to your superannuation fund as you get further into your retirement years.

According to the FSI, “The retirement phase of superannuation is underdeveloped and does not meet the risk management needs of many retirees.”

Here are some reasons why:

Uncertain life expectancy

Life expectancy tables are built on averages. Since each individual is different, nobody knows whether they are going to live ten years more than the average or ten years less than the average. Most, of course, are closer to the average than ten years, but either way it creates problems.

Since life expectancy is inexact from case to case, many retirees are put in a situation where they have to make lifestyle compromises so they don’t run out of money while they are still alive. Nobody wants to be broke, but nobody wants to scrimp and save, only to die “early” and leave a lot of money behind that they could have used to enjoy the time they had left.

Inflation

Inflation can be averaged out mathematically and integrated into a retirement plan, but what if inflation gets worse after you retire? Most financial planners will build a “buffer” into any computation that includes inflation.

Changing Investment Markets

While some use standard superannuation funds and some use self managed superannuation funds, none of them are guaranteed to continue to produce income at their current rate. While the standard strategy is to diversify, situations such as the Global Financial Crisis (GFC) can cause all investments to plunge. While most tend to bounce back in the long term, it can still be scary to lose 50% of your retirement in one day and then have to be patient and wait for your investments to return to their former values.

The Common Model

At this point, the common life expectancy used in retirement planning is 85 years. However, this can have tragic consequences for those who live longer than the average. The Government recommends using “income stream products with longevity risk protection,” but there aren’t a lot of them on the market.

Due to what the Government calls “regulatory and other policy impediments,” most retirement products fall into two categories: lump sums and income streams. Income streams also fall into two categories: annuities and account-based pensions.

Why You Need a Financial Planner

The bottom line is that retirement is tricky. One mistake can ruin your retirement and leave you with a compromised lifestyle. At Approved Financial Planners, we are fully qualified and licensed to provide sound, professional advice to help maximise your retirement.

We know the “ins and outs” of every financial market. We keep up on every issue, every product and every change in regulations. We offer the perfect balance between stability and flexibility.

Call 08 6462 0888 today to learn more.