Longevity: The Ups and Downs
30 May 2011
By Shadforth Financial Group
Across the globe the wonders of modern medicine are playing their part in increasing our life span. By way of example, for the period 2005 to 2010, the United Nations ranked Australia in the top 15 countries for life expectancy. This probably doesn't come as much of a surprise. For our male population, Australia is ranked fourth with a life expectancy of 79 years alongside Japan, Hong Kong, Switzerland, Sweden, Israel and Macau. And for our female population we rank third with a life expectancy of 84 years alongside Switzerland, Spain, France and San Marino.
So the good news is that we're living longer, but the bad news is that our retirement incomes may not last the distance — that is, they won't last our lifetime. In the changing profession of wealth management, we refer to this yin and yang as "longevity risk".
For the 400,000 plus Australians aged 85 and over, longevity risk is a way of life. These Australians lived through the Great Depression and the Second World War. They understand how to make sacrifices and 'to go without'. While the majority of these people live on an age pension, their baby boomer children won't, or don't want to — they are apprehensive of the age pension, to such an extent that they would rather not think about difficult issues and questions, such as how much will be enough to live on in retirement in the manner they so desire.
By 2030, the number of 85 and over Australians will rise to almost 800,000. And this number won't include the baby boomers. Between our 85 plus population and the baby boomers, the taxpayers of the 2030s will have a surprise awaiting them.
20 years ago Australians planned for their retirement believing that they would only require 10 years worth of income for their golden years. Nowadays many are retiring at 55 and living till they're 80. So not only are we living longer, but we're aspiring to retire earlier.
In addition, for the last 20 years the "state" has been taking care of our retirement funding through the superannuation guarantee.
First first-wave baby boomers worked and paid taxes for two decades before the superannuation guarantee was introduced. But despite this, many baby boomers understand that they haven't been contributing to our national savings plan for the entirety of their working lives, and even if they had, their expected retirement lifestyle is likely to be much more expensive than that of their parents. The guarantee has, we suspect, left many baby boomers with a false sense of security.
The positives are that we're living and working longer, particularly since the advent of the global financial crisis, however there's still a good 20 to 30 years of life beyond work that requires financial funding. The lack of financial funding for the improved life expectancy is of genuine concern for both individuals and governments. Yet interestingly, in a recent survey of more than 30,000 people in 26 countries it was found that traditional and entrenched attitudes towards retirement were shifting. While many countries are beginning to take on personal responsibility for retirement, Australians are heading in the opposite direction…
What's the solution?
Australians need to consider the big picture of their life by firstly taking the time to truly understand what they want out of life; what they want from their careers, their families and their finances and investments, so that they're ultimately aligning aspirations to build and maintain positive financial positioning.
None of this is hard to do, however the time and know-how isn't always readily available. New clients at Shadforth often ask us, "How much is enough?" There's no quick and easy answer to this question. We know that without investing time to understand our clients and their aspirations, the alignment of career aspirations, personal finances and quality of life will remain elusive for many.
In seeking to manage longevity risk it's important to consider how much wealth is being accumulating within superannuation and through other investment channels. There are many ways to build and maintain wealth, but the question is, "Are they the most optimal ways?" While it's a challenge for some to have to contemplate our golden years, it is important that we set aside the time to consider our priorities, weigh-up our choices and engage in a conversation about our aspirations. By taking action, engaging with ourselves, our families and our goals, we'll no doubt increase the quality of our life, both in the medium and long-term.