Longevity risk

At present, our average life expectancy is about 85, but many of us will live to be older. Not only are we living longer, due to improved medical treatments we are active for longer - the active elderly. As children Generation X (a person born between the early 1960’s and early 1980’s) would have been hard pressed to meet someone over the age of 85; octogenarians were less than 1% of the Australian population in 1974-75. Around the time the Gen Xers start turning 85, octogenarians and above are expected to equal today’s population of Brisbane; around 2million or close to 5% of the Australian population.

Not only will the future Gen Xers have plenty of people their own age, there will still be plenty of active Boomer’s (people born between 1946 and 1964). In 40 years the number of people over the age of 100 is expected be around 40,000; a dramatic increase on the 122 Australian centenarians in 1974-75.

This trend is only going up for later generations. The last of the Millennials (someone born in early 2000) can expect their grandchildren to live to be 96 on average – that means at least half of that future generation can expect to live past 100.

People who are smart with money first think about their goals; what do they want. They then develop a saving and investment plan that is likely to get them there. The problem is that we are often juggling diverse priorities; a car this year, a holiday next year, a new home or renovations in the next few years all while still enjoying life today.

Generation Y and the Millennials may not recognise it yet, but the Boomers now understand that our most significant lifetime goal is the financial confidence to finish working.

All savings and investment plans have unknowns; we can only estimate how much an investment might earn or if that holiday will cost more next year for example. Some also have to deal with the unexpected such as injuries and accidents. Making a plan for financial self-sufficiency is even more difficult because we don’t know how long our savings need to last.

The possibility of outliving our saving because we live longer and more active lives than expected is called ‘longevity risk’.

Many Australians expect to work well past the traditional retirement age; even if only part-time. This helps reduce the time we need to rely on our savings alone. But longevity has a double impact; you might need to make your own savings stretch a little farther and any bequest from prior generations will be delayed.

A discussion about the inner workings of superannuation is beyond the scope of this article. Suffice to say that savings within superannuation enjoy significant tax advantages but there are restrictions on how much can be contributed and when and how money is withdrawn. Over a lifetime everyone has a plethora of financial needs and wants; sometimes we need access to our money now. This means we need a number of savings buckets, both inside and outside superannuation, even if we only use our savings to top up our super balances later.

Australians approaching retirement age today have on average close to $200,000 in superannuation. This shows diligent saving by people who only had access to superannuation for a small part of their working lives. Going forward, in a world of low interest rates and moderate economic growth diligent savings alone, even in the tax-advantaged superannuation environment, may not be enough.

Whether you are still working toward a financially independent retirement, or managing your savings to last a lifetime, we need a different relationship with investing and dealing with risk. Fearing the possibility of having to live very frugally to eke out our savings in our long golden years should rank at least equally, if not more than the fear of investing beyond the safety of cash.

Everyone has unique circumstances and one savings and investment plan can’t fit all. But it’s worth remembering that 20-25 years - whether that’s retirement years or the time until you expect to retire - is a long investment time frame. Viewed on this scale many of the bumps and dips in investment markets become a less troubling smoother trend.

Many of us face the same challenge; we are well short of what might be reasonably required for financial self-sufficiency. To close the gap, some of us may need to revisit our attitude to borrowing to invest. We are so familiar with borrowing for big commitments that we forget that borrowing to invest can be done on a smaller, more manageable scale that matches our goals and circumstances. And learning the lessons of the investing can be painful; just as a house needs occasional repairs you don’t leave investments untended, particularly when borrowing.

There are no guarantees except that our world continues to change. Retirement plans that suited our grandparents may not be appropriate for the many Australians who can expect to celebrate their 90th birthday and more.

If you have any questions or would like to discuss your loan account, call us on 1300 307 807.

This information is correct as at 23 February 2016.