“Longevity Risk” concerns the liklihood of living a long enough life to run out of money.
While life expectancies have increased, some of the traditional forms of income support enjoyed by some of the previous generation have diminished. For example, most defined benefit superannuation schemes (that promise to pay a lifetime indexed income to the member) closed to new members long ago. Also, a revised means test makes access to the Centrelink Age Pension more difficult. Further, most people would not know their lifestyle costs and how these will change during retirement.
Financial advisers have typically addressed this issue by applying strategies that involve guaranteed income from annuities and the Centrelink Age Pension to meet “core” living expenses while superannuation account based pensions and other savings fund the discretionary spending that can enhance lifestyle.
Although “longevity risk” is a big concern for many Australians, research by Millmann suggests that some may be over-concerned! It suggests that spending generally declines over the retirement years by 6-8% every 4 year age band before plummeting from age 80. However, home ownership status, postcode and level of wealth will affect their spending patterns. Millmann say that more research regarding spending patterns will assist in the management of longevity risk.
Further, proposed legislation requires superannuation funds to offer members with an account balance of at least $100K, a retirement income product from July 2022 that addresses their longevity risk and retirement income needs while providing some flexibility. We expect super funds to formulate different approaches to this difficult challenge.