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).
Frequently Asked Questions about this Article…
Can I afford to live to 104 — how likely is it that I’ll outlive my retirement savings?
Living a very long life is a real risk for retirees. The article notes about 50% of people live beyond average life expectancy and roughly 10% of couples will see one member live past 104. That means many retirees may need far more than they initially expect, so planning for longevity is important to avoid outliving your retirement savings.
What are the main reasons retirees outlive their savings?
You can outlive your savings because you haven’t saved enough, your investments deliver poor returns, you spend more than planned, or you live longer than expected. These four factors — insufficient savings, weak portfolio performance, overspending and greater longevity — are the core reasons cited in the article.
How does the sequence of returns affect retirees compared with people still saving?
During the accumulation (saving) phase the order of returns matters less — a 50% gain over 10 years gets you the same result regardless of timing. In the withdrawal (retirement) phase the sequence of returns matters a lot: early negative returns while you are withdrawing money can permanently reduce your portfolio and increase the risk of running out of money.
What practical steps can everyday investors take to reduce the risk of outliving their retirement savings?
The article outlines six approaches: lower your living standards and rely partially on the age pension, save more for potential needs, build fallbacks (like part-time work or downsizing to free equity), delay retirement to shorten the withdrawal period, consider lifetime annuities, or use guaranteed retirement income products (GRIPs). Each option has trade-offs, so mixing strategies can help manage longevity risk.
What is a lifetime annuity and what are the pros and cons for retirees?
A lifetime annuity buys you an income stream for life (often inflation-linked) with the insurer taking the longevity risk. Pros: it removes the risk of outliving your income. Cons: returns can be relatively low and if you die early there’s typically no residual lump sum paid to your estate — that’s the trade-off for the insurer covering your longevity risk.
What are Guaranteed Retirement Income Products (GRIPs) and how do they differ from lifetime annuities?
GRIPs aim to combine equity exposure with a guaranteed minimum lifetime income. The article cites Macquarie’s Lifetime Income Guarantee and AXA North’s Protected Retirement Guarantee as examples. Compared with lifetime annuities, GRIPs usually offer a lower guaranteed minimum but allow for potential equity upside and an account balance that can be paid to your estate; however, you remain exposed to early-year equity performance and the issuer’s credit risk.
Should I put the bulk of my retirement savings into one annuity or GRIP with a single issuer?
No — the article warns about credit risk on the issuer. Putting the bulk of your retirement savings into one product concentrates issuer risk, so it’s generally wiser to diversify across products and issuers rather than relying on a single provider for your guaranteed retirement income.
How can delaying retirement, downsizing or returning to work act as effective fallbacks for longevity risk?
Delaying retirement can significantly extend the life of your savings — an extra few years of work can add many years of financial resilience. Downsizing your home frees up equity you can use for income, and returning to temporary or part-time work provides a fallback income source. These options reduce pressure on your portfolio and help manage the risk of outliving your retirement savings.
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