Outdated longevity tools not best practice for retirees

Longevity tools financial planners use may not reflect best practice when it comes to Australia’s increasing life expectancy, the Actuaries Institute believes.

In a research note, the actuarial body said to have more than a “coin-toss chance” that a person’s retirement planning horizon was sufficient, planners needed to look at a timeframe that gave 80% or more certainty of being sufficient.

In 2010 the basic ‘look up’ tables to estimate retirees’ longevity increased lifespans to 87 and this is what was still used today.

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“But financial planners need to also consider how much this will increase between now and the time someone retiring today reaches their 80s or 90s,” it said.

“A healthy, well-educated female entering retirement today, who had an affluent career and enjoys a good quality of housing, is just as likely to live beyond age 100 as she is to die before age 80.”

It said basic lookup tables use in legislative instruments and financial planning tools used by advisers did not allow for this critical planning issue.

“Clients need significantly different advice and strategic investments than if their life expectancy was assumed to be age 84 or 87,” the institute said.

“Factors that affect longevity include improvements in medical research, living standards, nutrition and lifestyle, education, occupation, genetics and wealth.”

The institute said advisers and planners needed to use more recent life expectancy tables and 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 the likelihood that the recommended planning horizon is sufficient; and
  • When looking at groups (e.g. from the perspective of an advice group or a superannuation fund trustee), model the number of people who will live to each future age, rather than

focus on the 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,” the research said.

“If the lens through which we view retirement is inaccurate, then incorrect conclusions will be drawn about retirement strategies and products.”

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