Longevity Risk:  Will You Outlive Your Savings?

When it comes to planning for retirement, many assumptions need to be made, but one of the most unpredictable is how long we’ll live — and whether our savings will be enough to support us throughout our retirement.

Thanks to medical advancements, Australians are living longer than ever before. While this is great news, it also means that our savings need to stretch much further to cover these extra years.

For retirees and those nearing retirement, this is a significant source of stress, especially when factoring in rising healthcare costs, inflation, and unexpected expenses. But that doesn’t mean that a retirement that’s both long and prosperous is out of reach.

How Long You Can Expect to Live

While life expectancy in Australia fell slightly during the pandemic years, it’s still one of the highest in the world. Only citizens of Japan, South Korea and Switzerland enjoy longer lives than the average Australian.

ABS data from 2024 puts life expectancy at birth at 81.1 years for boys and 85.1 for girls. But those numbers aren’t static — the chances you’ll reach an older age tend to go up as you survive each decade. ^[1] For example, by age 60, the average Australian man and woman can expect to live until 84.2 and 87.1, respectively — slightly higher than their life expectancy at birth.

While your individual lifespan will depend on various factors, including your health and lifestyle, having an estimate is crucial for retirement planning.

What is Longevity Risk?

Longevity risk becomes more pressing when you start thinking about retirement. It’s the risk that you’ll outlive your savings, which is a real concern for many retirees.

While the Government Age Pension can provide some relief, it often doesn’t cover all the costs of living, particularly as medical bills and aged care costs rise.

Many retirees self-insure against longevity risk by tightening their purse strings or only drawing down the minimum amount of super each year. But this can be a problem in itself — while you’re less likely to burn through your savings, you might wind up denying yourself the retirement you dreamed of all your life.

Going The Distance

Average life expectancy statistics are a useful starting point, but there’s a 50% chance you’ll live beyond the average, so having strategies in place to fund your retirement beyond average life expectancy is important.

Here are a few ideas to get started:

• Boost your super contributions: If you’re still working, consider increasing your super contributions. Even small, regular contributions can make a big difference in the long run.
• Stay flexible with your plans: Your retirement strategy doesn’t have to be set in stone. Be open to adjusting your lifestyle — whether it’s downsizing your home or taking on part-time work — to make your savings last longer.
• Check your eligibility for the Age Pension: Depending on your income and assets, you may qualify for the Government Age Pension. Your financial adviser can help you determine eligibility and integrate this into your retirement projections.
• Consider a lifetime income stream: For greater financial certainty, explore incorporating options like annuities into your retirement planning. These products provide a steady, predictable income for life, helping reduce the risk of running out of money.

There’s no ‘one size fits all’ approach to retirement planning, and it doesn’t have to be solo journey.  Your financial adviser will be able to look at your unique circumstances and recommend a plan to help keep headwinds to a minimum and your retirement goals intact.

[1]  Australian Bureau of Statistics