Life expectancy and retirement: can a new tool help you plan?

Must know

  • New life calculator gives you hints on likely life
  • The tool can be used with more widely available longevity calculators, which show how long your savings are likely to last

It may seem morbid to think about when you will die, but it’s an important thing to consider when planning your retirement years. If you want your retirement income other than old age pension to continue for the likely length of your life, it may be helpful to have more information about your life expectancy.

It’s here that a new calculator developed by Optimum Pensions comes into play. It aims to give you a more accurate prediction of your lifespan than existing tools.

The company offers lifetime pensions, but says the calculator is “product independent” – that is, not tied to any of its particular products – and is primarily designed to educate consumers on lifetime.

There are two different versions of the tool: one gives a general prediction of your lifespan; the other gives a more detailed estimate that takes into account lifestyle factors such as smoking, exercise and healthy eating.

A more up-to-date life calculator

Some super funds already offer simple calculators that predict your lifespan, based on census data. A 2018 research paper also suggests that many financial planners are obtaining life expectancy data from Australian life tables.

But David Orford of Optimum Pensions says these calculators are based on old numbers. “The life expectancy tables are still obsolete because they are based on the census taken years earlier,” he says. “All of the medical improvements over the past 20-30 years are significant in increasing lifespan and people living longer.”

Life expectancy tables can also give you a lower figure than is realistic, as they include people born with serious health conditions that have reduced their life expectancy. But people who reach retirement age in good health have above-average life expectancies.

Limits of a life calculator

Some other life expectancy calculators incorporate more details than the Optimum Pensions tool. They might, for example, ask you if you have a pet, if you’ve made new friends in the past year, if you play word games, and how often you eat processed foods.

There are some external factors that no calculator can take into account: disease, pandemics, accidents, and luck.

The Optimum Pensions tool has less detail and is meant to be reasonably quick and easy to use.

The calculator warning indicates that there are some external factors that no calculator can take into account: disease, pandemics, accidents, and luck. It also cautions that the calculator should not be used by people with a life-threatening illness.

Build, not reduce

The Retirement Income Review (RIR) pointed out that there is too little advice for Australians on how to manage and get the most from their retirement income.

“In retirement, there are a host of new decisions that you’ve never really faced before,” says Adam Butt, associate professor at the Australian National University. “Longevity is just one of the new things a retiree needs to think about. “

Nga Pham, a researcher at Monash University, says: “There is a lot of emphasis on the accumulation phase (of super) but not much on the decumulation phase. Individuals need to learn what the risks are and how to manage that risk. , and they have to do it themselves. “

With that in mind, more sophisticated planning tools can ease the uncertainty surrounding your years after work, help you better manage your retirement income, and ultimately enjoy a better lifestyle.

Try the calculator

I answered a few basic calculator questions about my health and found my expected lifespan with a 50% confidence level to be 87. With a 95% confidence level, she passed. to 102. Note that this result does not mean that I am likely to live to be 102 years old – rather it means that there is only a five percent chance that I will survive that age.

Examination of retirement income found that most retirees die with most of their wealth before retirement intact

The more information you have to guide your retirement planning, the better, but it’s important to put the calculator’s results in context.

There are other points to keep in mind:

  • Many people spend less in retirement because they are wary of future costs they might face. The RIR has found that most retirees die with most of their pre-retirement wealth intact.
  • The age pension will continue to provide you with retirement income.
  • Which retirement products are best for you will depend on your savings, how much income you want, what to expect from retirement, and other factors.

Confidence levels

An important concept in retirement planning that the new life calculator incorporates is that of confidence levels.

“[They‘re] something that wasn’t part of most calculators, ”says Butt.

“Yes [the calculators] don’t include information like trust levels, you’re not creating a culture where people understand uncertainty. It is not only relevant for the lifespan; the other place where this is relevant is the investment risk. “

Better understanding

Butt also believes that this part of the calculator has a valuable role in helping people understand the concept.

A 2018 study showed that financial planners typically use a life expectancy figure that only has a 50% confidence level. This means that there is a one in two chance that you will survive to the expected age.

Research on retirement planning commissioned by Super Consumers Australia has found a strong preference for information presented at the highest level of confidence.

Life calculators and longevity calculators

Pham and Butt believe the lifespan calculator could be used productively with a longevity calculator. The latter aims to predict the age at which your savings would run out.

“Post-retirement balance calculators get you thinking about the lifespan of your money, so combining that with something like a lifespan calculator adds at least one more piece to that puzzle,” Butt says. .

“If my balance calculator tells me my money is going to run out at [age] 92, the lifespan calculator gives me some context as to whether this is an appropriate number or not. “

Pham says both pieces of information are useful. “If I’m someone who is looking at how I should manage my retirement savings, I need to know the answers to both,” she says.

Life annuities

This particular calculator aims to raise awareness of annuities, or life pensions, which have not traditionally been widely purchased in Australia.

There are a range of annuities with different characteristics, but generally an annuity (or life pension) provides you with ongoing income in exchange for paying a lump sum.

You can use an annuity to help you “smooth out” your income during retirement. They offer less flexibility than an account-based pension, but more certainty about the duration of your earnings. For example, a life annuity (or annuity) gives you an income (in addition to the old age pension) for as long as you live.

According to ASIC’s Moneysmart GuideThe downsides to annuities include your money being “locked in” and not available for a lump sum withdrawal.

One option among many

Buying an annuity is just one option for managing your retirement income. You can instead choose an account-based pension or other investment, or a combination of these depending on your situation.

The old age pension already provides substantial longevity risk insurance for most Australians

Grattan Institute

The government Retirement income commitment, scheduled to start in July 2022, should make retirement income products better suited to the needs of retirees. This will force super funds to think about how they can help members balance maximizing their retirement income while still having some flexibility in accessing their money.

The Grattan Institute has pointed out that the old age pension is “often overlooked” in pension product discussions and “already provides substantial” longevity risk “insurance for most Australians.

This is an important point. Retirement planning media coverage often speaks of retirees “strapped for cash.” But if you qualify for old age pension, you will still have that income.

The future

Butt says these calculators could be developed further to help people make decisions about what to do with their retirement money.

“A calculator could show the impact of these types of [retirement income] products in terms of expected retirement income and – this is the key element that they do not have at the moment – the volatility of that income. “

Pham says the super funds themselves could use these types of custom calculators to help their members make decisions. “Super funds could come up with a model and combine the two answers on the lifespan (of fund members) and the duration of their savings,” she says.

“This would be very beneficial because right now understanding and managing risk is a lot of work for members. But again, the issue is how to make it easier for members to understand.”

Make retirement planning easier

Super Consumers Australia Director Xavier O’Halloran said the next step would be to give people an easy way to compare retirement products.

“We now have a super fund comparison tool that makes it easier for people to find a quality super fund while they are working,” he says.

“For those who are retiring, there is a real lack of independent and quality information on how these products work and how they compare.

“If we don’t try to make retirement planning easier, retirees will be left in the dark about how best to manage their retirement savings.

“At the end of the day, people will have a much lower standard of living than they can afford in retirement.”

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