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Understanding Longevity Risk for Retirement Planning

Understanding Longevity Risk for Retirement Planning

Many retirees are living longer and enriching their retirement with bucket list items and creative hobbies. However, a longer life expectancy increases the possibility of outliving savings.

This longevity dividend comes with the challenge of possibly outliving one’s financial resources. But don’t worry. By acknowledging longevity risk and adopting proactive planning measures, you can safeguard your financial well-being in retirement.

Whatever your income status, this article will improve your understanding longevity risk for retirement planning and retirement savings.

What is Longevity Risk?

Longevity risk is the likelihood of outliving one’s retirement savings. It stems from life expectancy and investment market uncertainties, which may have severe consequences for retirees.

On average, men in Australia are expected to live past 75 and women past the life expectancy of 80. However, to be effective, longevity risk retirement planning should look beyond averages.

For financial security, longevity retirement planning must consider life expectancies, market uncertainties, risk appetite, and financial instruments.

How Longevity Risk Impacts Retirement

Retirement planning must account for the possibility and cost of outliving your savings. Addressing extended lifespans, inflation, health costs, and psychological well-being helps people manage longevity risk and retirement savings.

Disrupting the Old Model

Traditional retirement planning assumes a lifespan based on average life expectancies, which may underestimate the financial needs of retirees who live longer.

If you retire at 65 with savings to last until 85 but live to 95, you may not have enough funds. A retirement plan beyond average life expectancy estimates will factor in this potential shortfall.

Inflation Factor

As people live longer, they must spend more for retirement, which can strain their finances. In addition, inflation makes it harder because their savings won’t buy as much.

Including inflation, debt management, and life transitions like divorce in your financial planning helps to give you peace of mind in your retirement.

Stress on Healthcare Costs 

As people age, they are more likely to develop health issues such as dementia, diabetes, and heart disease, which require money for treatment and care.

These expenses add up quickly, affecting retirement savings. Studies suggest retirees may need 100% of their working income to retire comfortably.

Incorporating financial advice for aged care into retirement planning involves:

  • Factoring in the rise in costs of medical care.
  • Anticipating future illness.
  • Leveraging family and government support.

Psychological Impact 

Fear of insufficient resources to support old age is the psychological impact of longevity risk in retirement. It can manifest as constant worry about money, healthcare, and basic needs.

Financial insufficiency may cause longevity risk, causing retirees to lose peace of mind and a reduced sense of well-being.

Planning for longevity risk prevents feelings of helplessness and diminished control over one’s future.

Strategies to Address Longevity Risk

It is crucial to consider a range of strategies tailored to individual needs to better prepare for the challenges posed by longevity risk and ensure a more secure and stable retirement.

Income Planning Focus 

Several strategies may be employed in retirement income planning to provide retirees with financial security and peace of mind during their retirement years.

Pros & Cons of Various Retirement Income Strategies

Income from Lifetime Annuities

A lifetime annuity provides lifetime income for a lump sum. Retirees seeking stability and longevity protection may find this a suitable option.

A predictable income stream protects retirees from outliving savings and provides financial security despite market fluctuations.

However, fixed-income payments are irreversible, limit lump sum access, and may cause purchasing power to be lost if not adjusted for inflation.

Staggered Withdrawals from Superannuation

This involves withdrawing superannuation funds gradually rather than all at once. It is suited to retirees who want flexibility and tax savings.

Spreading withdrawals over the years gives retirees cash flow flexibility and tax efficiency. However, market fluctuations may affect investments’ value and withdrawals.

Guaranteed Lifetime Withdrawal Benefit (GLWB)

Some retirement products have GLWB, which guarantees a minimum income for life regardless of market performance. Retirees seeking market exposure and income security may consider this option.

With a guaranteed income stream, GLWB protects retirees from market downturns and longevity risk. However, GLWB products may have additional fees or reduced returns. Understanding their terms and conditions is crucial to maximising benefits.

Systematic Withdrawal Plan (SWP)

SWP involves setting up regular investment account withdrawals to create a steady retirement income stream. It is a great option for retirees seeking flexible income and investment account control.

SWP lets retirees modify withdrawal amounts to their financial needs and market conditions and control withdrawal timing and frequency.

However, withdrawals must be monitored due to market performance for sustainable retirement income management.

Longevity Insurance

Longevity Insurance is a deferred annuity that begins payments at an advanced age, offering protection against outliving savings in later years. Deferred annuities are ideal for retirees seeking a secure income and longevity risk reduction.

Longevity Insurance addresses longevity risk in later retirement stages and offers risk mitigation against the financial implications of living longer than expected.

However, it requires additional income sources and limits fund liquidity until insurance starts, restricting access to invested amounts.

Delayed Retirement 

Delaying retirement is ideal for those seeking financial security, a larger nest egg, and retirement stability.

Advantages and Disadvantages of Delayed Retirement

It may potentially boost savings and social security benefits and lower the Age Pension savings requirement.

Carry-forward contributions or bring-forward rules allow longer superannuation savings and tax-free returns.

However, extended working years may lower quality of life, limit leisure time, and expose people to market fluctuations, potentially affecting retirement savings.

Conservative Spending in Early Retirement 

Early retirement conservative spending involves lower withdrawal rates, which may be adjusted to investment success. It helps retirees bridge the income gap, protect their savings and adjust spending to ensure financial stability and longevity.

Advantages and Disadvantages of Conservative Spending in Early Retirement

Lower initial withdrawals in retirement provide financial stability, longevity, flexibility, and risk management by ensuring retirement funds last throughout the golden age and adjusting spending based on investment performance.

Retirement lifestyle expectations may be cheaper due to lower withdrawals. And conservative investors may miss out on high returns if investments perform well. Without guidance, monitoring and adjusting spending based on investment performance is difficult.

Early retirement requires tailored planning, professional advice, risk management, adaptive spending patterns, and long-term financial security. Financial advisers help retirees achieve their financial objectives, ensuring financial security and longevity.

The Role of Financial Advisers in Understanding Longevity Risk for Retirement Planning

The complexity of longevity risk retirement planning needs a financial adviser to accurately estimate life expectancy and coordinate financial strategies to support a longer retirement.

Why Seek Advice from a Financial Adviser

  • Personalised Advice Based on Risk Tolerance: Financial advisers evaluate risk tolerance, considering factors like age, income, health, and investment preferences, to recommend suitable investment options to optimise superannuation for a longer retirement.
  • Analysis of Financial Situation and Retirement Goals: Financial advisers comprehensively assess a client’s financial situation, utilising assets, liabilities, income sources, expenses, and retirement goals to create tailored retirement plans that effectively address longevity risk.
  • Integration with Superannuation Drawdown: Financial advisers help structure superannuation drawdown strategy by considering factors like life expectancy, market performance, and expenses to sustain retirement income over the long term.
  • Investment Strategy Alignment: Financial advisers collaborate with clients to create investment strategies for superannuation, adjusting asset allocations to mitigate market volatility and ensure sustainable retirement savings growth.
  • Overall Financial Goals: A financial and life insurance adviser assists in coordinating longevity plans with broader financial objectives, including estate planning, tax optimisation, and structuring retirement income streams to support future beneficiaries.

Case Studies

Planning for a secure financial future that can withstand the test of time is crucial. Let’s look at some case studies and read how others found peace of mind with longevity planning.

Karen and Geoff

Financial advice significantly improved the couple’s financial situation, enabling them to achieve their dream of moving into a new house and retiring comfortably.

The couple successfully transitioned into their dream home and achieved financial independence, allowing them to retire at their convenience.

Understanding Longevity Risk for Retirement Planning » Understanding Longevity Risk for Retirement Planning

Angela G

Angela’s personalised financial plan involved a diversified retirement portfolio and regular monitoring and adjustments to reduce risk and optimise long-term returns.

The tailored approach to Angela’s financial planning has given her the confidence and peace of mind to enjoy her retirement without financial stress.

Plan Your Retirement with Newcastle Financial Planning Group

Longevity planning aims to ensure a financially secure retirement by proactively addressing longevity risk and implementing tailored strategies, paving the way for a fulfilling future. However, it’s not a one-size-fits-all plan, and since everyone has specific needs and wants, hiring an expert retirement adviser can help you plan a secure and comfortable retirement.

If you want to enjoy retirement with peace of mind, knowing there is a financial strategy to protect your future, speak to the team at Newcastle Financial Planning Group. We help our clients enjoy their dream retirement through personalised financial advice.

Call us or book online to secure your consultation today!



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