Longevity itself isn’t the problem when securing a comfortable retirement, but rather a lack of knowledge amongst people about how much their lifestyle costs and how that expenditure is likely to change over the course of their retirement, Milliman believes.
A lack of accurate data on personal expenditure in retirement contributed with this, with Milliman saying that the industry had largely relied on estimates and surveys based on individuals’ memories to calculate spending.
Milliman said that retirement simulations should instead consider when retirement spending dips – typically around the end of an individual’s life – rather than presuming that spending would remain the same throughout someone’s life.
Milliman found, for example, that spending consistently declines over retirement by about six to eight per cent in each four-year age band before dropping drastically from age 80.
“This flawed assumption encourages retirees to be over-conservative with their spending. The many retirees who take out account-based pensions and then live frugally by drawing down the minimum allowable rate, is the classic case. Unfortunately they’re banking on a higher cost lifestyle that will never arrive,” Milliman said.
“We need to start to address this problem through the customer’s eyes and not through the industry’s lens. A deeper understanding of real-world data and behaviour is the starting point. It allows us to segment different types of retirees based on multiple facets such as wealth band, postcode, home ownership – the options are endless.”