Did you know Australia has membership to a new group more exclusive than the G-20? Recent data released by the Australian Bureau of Statistics (ABS) confirms that Australia has joined only three other countries in the world, namely, Switzerland, Japan and Iceland, where both women and men now have a life expectancy of over 80 years. Let’s call this group the ‘Longevity-4’, a group of countries where maximising the potential of all citizens, regardless of their age, is essential to future prosperity. This trend is not just about longer lifespans, there are some challenges we face with increased longevity, including whether folks who live these extra years do so in good health? What quality of life will we have across the domains of social, mental and physical activity?
A fourth domain that is gaining increased attention in the Longevity-4 (and beyond) is the impact of longer life expectancy in the financial domain. What are the financial consequences of people living longer? It is the mums and dads (perhaps more lovingly known as nanny and poppy) who are at the heart of this risk. The risk of running out of money in retirement, termed longevity risk, occurs when we outlive our retirement assets.
How can we efficiently and effectively convert our retirement savings into a stream of retirement income that lasts (it seems an increasing) lifetime? Perhaps the most striking feature of longevity risk is just how bespoke the risk is to each of us. The (relatively) easy part is to think about the asset side of our household balance sheet (our human capital/labour income, home, superannuation and other investments). Being able to fully understand our liabilities (retirement income, health care and aged-care needs) is far more challenging. Individuals planning for their retirement are unsure about how long they will live, how much they will need to finance their post-retirement lifestyle and, perhaps in the future, how much government support they will receive.
In a week where FoFA has again dominated the headlines, we know that quality financial advice is part of the conversation, as are improvements in financial literacy and the role of the public pension. Living longer has resulted in households facing some very serious investment challenges and there remains continued debate on how best to tackle them. Should we care more about asset volatility or income volatility in retirement? What is an appropriate allocation to equities through the different life stages? What is the role of inflation-linked bonds in retirement investing? Are systematic withdrawal plans best or annuities, or both? What are the gaps in the financial products that can assist households manage longevity risk (noting that Mr Murray and the Financial System Inquiry will soon make more formal recommendations on this question)? This is but a taste of the issues we can consider when trying to mitigate the dynamism of longevity risk.
And just when you thought you were starting to put a frame around the complexities of longevity risk, there are stark gender differences with this risk that warrant far, far greater attention. The latest data from the ABS shows that women (84.3 years) are expected to live longer than men (80.1 years). Recent analysis by the Australian Institute of Superannuation Trustees and Women in Super forum reported that the average Australian woman currently retires with just over half of the superannuation savings, when compared to men. Women live longer and have lower retirement balances, the result? Women face greater longevity risk.
It is time for a national conversation on longevity risk. My former colleague at QSuper, Rosemary Vilgan, has recently said that the next revolution in superannuation must tackle market risk and longevity risk. It is a sentiment with which I concur. As our population ages, we need co-ordinated approaches across the various retirement domains - social, mental, physical and financial. It is time for Australia to host the first ‘Longevity-4’ summit, where the opening line of the communique would state, “Tragically, the risk of the risk of fiscal death is outweighing the risk of physical death ...”
Michael E. Drew, PhD is Professor of Finance at Griffith University and a Director, Drew, Walk & Co.
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