Actuaries urge a rethink on longevity risk tables
/The Actuaries Institute Retirement Incomes Working Group is urging a rethink of the tables advisers use to estimate a retiree’s longevity and make calculations on how long savings will last. Retirees risk outliving their money based on the most recent longevity numbers - and the probable future increase.
The tools we use now to calculate retirement income don’t take future increases in life expectancy into consideration, only using current figures. For example, a woman in 1970 could have reasonably expected to live to age 80, however, in 2010 it was age 87. What will it be in 2025, 2030?
A well-educated woman with a well-earning career and good quality housing entering retirement in 2020 is just as likely to live to age 100 as she is to die prior to age 80. The 20-year difference is critically important, not just for living expenses, but for health and homecare needs at this age.
Longevity is affected by medical research, living standards, nutrition and lifestyle, education, occupation, genetics and wealth, the statement notes.
“To have more than a coin-toss chance that a person’s retirement planning horizon is sufficient, you need to look at the timeframe that gives 80% or more certainty of being sufficient,” the Institute says in a research note to financial planners.
Financial advisers may not be using best practice when measuring life expectancy. The Actuaries Institute working group involved in publishing the statement said that planners and modellers should use the most accurate Australian Government Actuary Australian Life Tables 2010-12 with the published improvement factors that allow for greater life expectancy.
The Actuaries Institute says that calculations should:
Use the age of both retirees if the household is a couple
Show the results in a way that considers the range of possible life spans and shows that the recommended planning horizon is enough
When looking at groups (for example from the perspective of an advisory group or a superannuation fund trustee) model the number of people who will live to each future age, rather than focus on an average age
“Retirees wanting confidence need to know what age to plan to in order to have, say, 90% certainty their planning horizon is sufficient,” says the research note.
“If the lens through which we view retirement is inaccurate, then incorrect conclusions will be drawn about retirement strategies and products.”
Author of the research note, Jim Hennington, is a member of the Actuaries Institute Retirement Incomes Working Group.
