Higher life expectancy raises tricky retirement questions
THE Bureau of Statistics recently announced that Australian male life expectancy has topped 80 years, putting us in a club of just four nations in which both males and females have life expectancies over 80.
While this speaks volumes about our lifestyle and health system, it also has a practical impact on retirement planning.
Fifty years ago the average man would be expecting to fund a retirement not much more than 10 years. But when life expectancies are over 80, both genders - and women in particular - will have to think about funding 20 years of living.
This will translate to longer working lives, but it also necessitates better retirement planning.
The planning starts with how much you need for your life style. The Association of Superannuation Funds of Australia (ASFA) has a retirement calculator online but their averages extend from around $23,000 per year for a single with a modest lifestyle, to $58,000 for a couple with a comfortable lifestyle.
Even if you and your partner can get by on $50,000 a year, how much would you need to accumulate over your working life to fund that?
This is the second piece of the longevity puzzle: how much should I have in super and other investments when I retire? The typical outlook is to say that if your investments can generate 5 per cent per annum, then $1 million will sustain you as long as you're alive.
But in practice inflation and taxes take around 3 per cent, leaving you with more like 2 per cent yield.
So what do you do? You have to start by focusing on getting more out of your investment strategy.
Traditionally, as people near retirement they push most of their investments into cash which is low-returning but capital guaranteed. They do this to avoid the market risk of shares, but in doing so they make themselves vulnerable to inflation risk.
Retirees typically would shift all their non-housing capital into cash because they didn't expect to live much more than a decade past retirement.
But with 20 years to live, retirees will have to allocate at least some of their lump sum to capital growth. In other words, to fund 20 years of living they'll have to generate regular income as well as capital growth inside their portfolio which means they'll need 'cash', 'balanced' and 'growth' options.
There's already an array of annuity and pension products that retirees can invest in, that will take much of the thinking out of this. If this is overwhelming, it's worth talking to an adviser and starting to plan.
Most financial planners are already shifting retirees towards this style of investing. The good news is that a longer retirement might be expensive to fund, but it also gives you the scope for a properly diversified investment strategy.
* MARK BOURIS is the executive chairman of Yellow Brick Road Wealth Management.