Can you afford to live to 104? If you outlive your savings, it's because you don't have enough, your savings perform poorly, you spend too much, or you live longer than you expect. A financial planner might tell you $1 million of super will give you a comfortable retirement. That's true, if you're 65 years old and live only another 20 years.
Trouble is, about 50 per cent of us will live beyond the average life expectancy and many well beyond it. Ten per cent of couples will see one member live past 104. That means what you think you need might be only half what you actually need.
If you've already cottoned on to this problem, perhaps you're targeting a higher rate of return to compensate for the extra years. This leads to a "time-based" problem.
In the "accumulation" phase (saving rather than spending), the sequence of returns doesn't matter.
If you start with $100 and generate a 50 per cent return over 10 years, you will finish with $150. Whether the return is consistent each year or arrives in one 50 per cent lump in the 10th year doesn't matter.
For retirees in the "withdrawal" phase, it matters very much. They're more exposed to volatility of returns and, as a result, usually have a more conservative portfolio that doesn't deliver the returns they need.
Here are six ways to address this problem:
Lower your living standards. It's likely there will always be an age pension and associated benefits, although it's likely to be less rather than more generous than it is today. For most retirees, relying on it isn't satisfactory.
Save to life potentiality. This means saving for possible rather than likely needs, an approach that replaces a potential problem (outliving your savings) with a certain one (having to save more now). Again, not ideal.
Fallbacks. This means adopting a more growth-oriented portfolio and having a fallback option such as returning to work ( temporary or part-time), downsizing your home to free up equity, and reducing your income needs.
Delay retirement. Some retirees might be retired longer than they worked. So why not increase your working life? An extra three years of full-time work might add five to 10 years to the life of your savings.
Lifetime annuities. These products allow you to buy an income stream - typically linked to inflation - for the remainder of your life, with the issuer taking the risk that you live to 100. Not to be confused with term annuities, they simply pay you interest and principal during a fixed time frame. Lifetime annuities have two big drawbacks. Returns can be quite low and if the recipient dies early, there's no "balance" paid out to the person's estate - the issuer simply stops paying. This is the trade-off for the insurer taking the risk of paying you past average life expectancy. Investors are put off by low returns and the lack of a lump-sum payout to their estate. But in an age when people insure their homes, vehicles, travel plans, income and life, why not insure against ending up with just the government pension?
Guaranteed retirement income products (GRIPs). These aim to give investors the best of all worlds, allowing them to invest in a portfolio including equities but also guaranteeing a minimum level of income for life. GRIPs are offered in Australia by Macquarie (Lifetime Income Guarantee) and AXA North (Protected Retirement Guarantee). GRIPs take an insurance approach to longevity. Each year, your "account" is, in effect, charged an insurance premium. Your guaranteed minimum income will be less than a lifetime annuity, but a GRIP offers the chance of equity returns (and an increase in the guaranteed minimum income), plus an account balance that can be paid to your estate. Together with the age pension for those who qualify, it guarantees a minimum "base income". The downside is you remain exposed to early-year equity market performance. Like annuities, you have credit risk on the issuer, so don't put the bulk of your retirement savings into one product.
None of these options is a silver bullet, but making a few small trade-offs today means you can significantly reduce the possibility of outliving your retirement savings.
Richard Livingston is the chief executive officer at Intelligent Investor Super Advisor, super.intelligentinvestor.com.au. This article contains general investment advice only (under AFSL 282288).