Mar 15, 2023  | Tags: Retirement, retirement planning

Our insights

None of us know exactly how much money we will need in our retirement. The biggest and most obvious reason is because we don’t know how long we will live.

Calculating how much money you will need in retirement is based largely on how much you can afford to invest now and a very conservative estimate of how long you’ll be spending it.

Rolled into that equation is the great unknown of how the market will perform during the years you need it most. It all adds up to what is known as the ‘longevity risk’ - the risk of running out of money in your retirement.

It’s a pretty scary thought but one many have to grapple with as they approach their final decade in the workforce.

Life expectancy

In 2023, the life expectancy in Australia is 83.94 years. Women are tracking toward 86 years while men are inching towards 82.

Of course, that doesn’t guarantee anyone anything, it is just a guide.

But it did prompt the government to lift the age a person qualifies for the pension to 67 if you are born after 1 January 1957.

For those born after 30 June, 1964, your superannuation cannot be accessed until age 60.

Ideally, you’ll want to keep as much of your super working for you as long as possible, and to have built up a bank of other investments to support your retirement lifestyle.

You may be able to incorporate the age pension when you become eligible, to provide the income you need.

But there are other options.

And for those not blessed with millions in the bank, investments or a monster inheritance to get through, there are tools you can use to help you sail into your golden years with some semblance of calm.

Managing longevity risk

The Australian market is not flushed with options to tackle longevity risk but two stand out while a third is worth considering.

Account-based pensions

A popular product that provides an income stream for retirees but has its drawbacks. It is not guaranteed for life and its duration will be heavily influenced by market forces.

Longevity risk can be reduced by carefully monitoring the allocation of investments and the level of income drawn down each year.

Lifetime annuities

An annuity provides a guaranteed income stream for the rest of your life, which may be indexed to inflation. It is also unaffected by changing economic conditions.

Despite this, it is not as popular as account-based pensions because the level of income is fixed at the time of purchase is generally fixed access to funds is not as flexible as an account based pension and it may attract a significant surrender fee.

Reverse mortgages

Still a largely misunderstood and suspiciously viewed product, reverse mortgages allow people 60 years of age with equity in their home to convert that equity into a new income stream.

The beauty of it is that it allows retirees to remain in their home which is what the vast majority want.

Reverse mortgages are highly regulated in Australia for the protection of consumers.

A global equity report released in 2020 predicted that reverse mortgages will triple in Australia by 2031.

There are other similar mechanisms that take advantage of your home equity.

These include an equity release agreement, home reversion (agreeing to sell part of the future proceeds of the sale of your home now in exchange for a lump sum) and the Home Equity Access Scheme.

Regret risk

While longevity risk is an issue many seniors will need to consider, ‘regret risk’ is also worth understanding. This is when people pass away without utilising their retirement savings as much as they should have.

It may be a goal for many to leave assets to their children. But the reality is that some retirees leave as much as 90% of their wealth behind because they have been too conservative in their retirement.

Regret risk is the risk of regretting not spending more and enjoying life while you were still active and able to.

People should appreciate that retirement can be divided into three phases and that if they suddenly pass away, they may not reach the third or even second:

Active -  This is when retirees should spend the greatest proportion of their money and enjoy things like travel while they remain mobile and healthy.

Passive -  Travel becomes more problematic as mobility decreases and discretionary spending reduces significantly in this phase.

Frail - Failing health becomes the primary concern and cost which may be largely covered by private health insurance. There is little other spending. Many retirees spend little or no time in this phase.

Get advice today

Juggling that fine line between longevity and regret risk can do your head in.

It’s only natural to err on the side of caution to ensure you have more than enough in reserve for the unknown number of years ahead.

But nor do you want to waste good time while you remain fit and healthy.

That’s where Calder Wealth Management can help.

We are wealth experts who can help you design the right retirement strategy for you, and make the best financial decisions for your long-term interests.

There really is no substitute for quality financial advice from someone personally invested in your future. 

At CWM, we pride ourselves on leading our clients into the future with structure, financial stability and confidence.

Contact us today to discuss all of your financial needs and concerns.

Written by Anthony Hill

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

CWM specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.