Making your money last: Managing longevity risk early on
If, like most Australians, you’re dreaming of a long and purposeful retirement, planning early on will give you the freedom to enjoy your 20 plus years of retirement without worrying that your money will run out.
The reality is however, that most retirees face a fair amount of longevity risk, which is essentially the risk of outliving their retirement funds.
One reason for this is that increasing life expectancy in Australia means that you may underestimate how long you will need funds. According to the Australian Bureau of Statistics, an Australian that is currently 65 years old is expected to live another 20 years into retirement. We know that proximately half will live even longer than this.
Second, the rate at which you draw down on your retirement funds may not be sustainable. This can result from spending without a budget.
Strategies to manage longevity risk and reduce uncertainty
The good news is, there are some simple steps you can take to minimise your longevity risk:
- Plan early in the lead up to your retirement. Timing is crucial. Planning prior to retirement will allow you to grow your super and determine a draw down plan.
- Determine your retirement budget. You can reverse engineer a budget based on your existing expenditure levels. Budgets need to be realistic and consider fixed and variable expenses.
- Identify small adjustments you can make to reduce your spending. Small changes add up over the medium and long term and can have a significant impact on the duration that funds will last. Start by identifying major expenses you can reduce.
- Modify your current spending to minimise the variation in your pre-retirement and retirement budget. The smaller the variation, the less need there will be for a major spending adjustment.
- Trial a restricted budget pre-retirement. Determine whether your lower budget allows you to fulfil your retirement goals.
- Review your asset allocation. Downward market movements can affect your retirement income. You need to weigh up the level of risk you’re prepared to take in order to reach your retirement goals and lifestyle objectives.
Defined benefit pension members face reduced longevity risk
If you are a member of a defined benefit scheme you may be able to choose to receive a portion of your benefit as a lump sum or as lifetime pension.
If you’ve chosen a lump sum benefit, you are subject to longevity risk as you’ll have to manage how you draw down on it in retirement.
If you’ve chosen a lifetime pension your payments are indexed and guaranteed for life. While you will have certainty in your income, there is the risk that that income level might not meet your retirement goals.
Financial safety nets are available
You have options if your retirement funds run out early.
In many cases, your retirement income can be supplemented by the Centrelink Age Pension. As your level of assets reduces your age pension entitlements go up. A single person, for example, is entitled to a partial pension when their assets are down to about $550,000 and a full pension when their assets are down to around $250,000.
You can also start accessing the equity in your home to fund your retirement.
Develop a drawdown and investment plan
The first place to start when reducing longevity risk is to develop a drawdown and investment plan for your retirement funds. Your plan should cater to whether your individual priority is to retire earlier or retire when you have accumulated a certain level of retirement funds. The earlier you start, the better position you’ll be in the long run. Your financial planner can work with you to put together strategies to achieve your retirement goals.
Need help managing your money?
Getting expert advice can make a big difference to how prepared you are for retirement - both emotionally and financially. By discussing your lifestyle goals with a StatePlus financial planner you’ll have a much better understanding of the super and income you’ll need to make retirement a positive change in your life.
For more tips and tools, download our free Retirement guide or call us on 1800 620 305.