Annuities can finance our longer lives - and help us get a good night's sleep
Running out of money before you die is a terrifying thought that is giving many retirees, or probably anyone over 50, sleepless nights.
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.