Annuities can finance our longer lives - and help us get a good night's sleep
That's because we are all now acutely aware, thanks to the GFC, that markets don't always go up, and if the first year of our retirement coincides with a market crash, the future doesn't look so bright.
"Certainty and security are far more important to retirees than we thought even five years ago," Andrew Boal, managing director of Towers Watson Australia, says.
You also may not realise that even if your life expectancy is 83, you will probably live beyond that age if you make it to 65. That's because the life-table numbers are weighted by people who are killed in car accidents in their 20s.
"If you're reasonably healthy there is a good chance of you living to 90," Tim Furlan, director of superannuation at Russell Investments, says.
The biggest causes of death after 80 are cardiovascular disease and cancer, so if you deal with them by not smoking and maintaining a reasonable level of fitness, there is a good chance of living longer.
Melinda Howes is chief executive of the Actuaries Institute and knows her way around life expectancy and longevity tables. "A lot of people retiring now will live to 100," she says.
If making your funds last a potential 35 years after retirement is giving you a headache, there are options.
One solution is a deferred lifetime annuity (DLA), which is effectively longevity insurance. When you retire, at say 65, you can decide to use a certain amount of your retirement sum - usually about 10 per cent to 15 per cent - to buy a DLA that would give you a guaranteed income from a specified age, usually about 85. That means you can work with an end date in mind; that is, you would know that your retirement savings, minus the amount spent on the DLA, need to last you up to 85.
Of course, these products becoming a reality hinges on proposed changes to superannuation getting through. But even if this government cannot get Superannuation Minister Bill Shorten's proposals through Parliament, it is expected that the Coalition would not object to the proposal that would give DLAs the same concessional tax treatment that superannuation assets' supporting income streams receive.
Shorten says the DLA proposal would not have any financial impact, which augurs well for the proposal in a new government. As former prime minister Paul Keating said last year, "We don't expect conservative parties to believe in much but we do expect them to believe in thrift". Those who oppose DLAs believe their take-up will be slow because Australians have traditionally been reluctant to hand over their money to life insurers.
Melinda Howes says it's all about how the product is presented to you.
"They [Australians] view it as a risky gamble rather than purchasing insurance," she says.
"They view it differently to paying money for home insurance."
If it is presented as an option for guaranteeing your income forever once you do turn 85, and you understand that the odds of you turning 85 once you reach 60 are increasingly good, then they become rather more attractive.
Not everyone is convinced, though. Tim Furlan says his organisation encourages investors to defer the purchase of an annuity until they approach 80, rather than purchase the deferred product on retirement. "If the world changed and everyone went out and bought them, then the market could develop in a way that made these things useful," he says.
Frequently Asked Questions about this Article…
A deferred lifetime annuity (DLA) is a form of longevity insurance where you use part of your retirement savings to buy a guaranteed income that starts at a specified later age, commonly around 85. The idea is to spend a small portion of your pot now so you can be sure of an income if you live into very old age.
The article says retirees would usually use about 10 to 15 percent of their retirement sum to buy a DLA, leaving the remainder to support income up to the DLA start age.
Annuities provide certainty and guaranteed lifetime income, which can reduce the anxiety caused by market volatility and the risk of a poor early retirement year. Experts in the article note that certainty and security have become far more important to retirees since events like the global financial crisis.
Deferred lifetime annuities in the article are described as usually beginning payments from about age 85, so you plan your drawdown knowing you have guaranteed income after that point.
The article discusses a proposed change to give DLAs the same concessional tax treatment that supporting income streams from superannuation receive. The proposal is part of broader superannuation policy changes and is expected to be politically acceptable.
The article notes that some believe take-up could be slow because Australians tend to be reluctant to hand over money to life insurers. How the product is presented matters; framing it as guaranteed lifetime income rather than a gamble can make it more attractive.
Views differ: one expert in the article recommends deferring the purchase of a deferred annuity until you approach about age 80, rather than buying one on retirement, while others highlight using a small portion of savings at retirement to secure late-life income. Personal timing may depend on your circumstances and preferences.
The article points out that if you reach retirement age your chance of living well beyond average figures rises, with some experts saying reasonably healthy people have a good chance of reaching 90 and many retirees may live to 100. Because of that longevity risk, products that guarantee income later in life can be useful for covering long-term living costs.
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