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Longevity proofing your retirement portfolio


The Australian Bureau of Statistics (ABS) reported in October 2018 that Australian life expectancy continues to increase each year as the estimated life expectancy of males is at 80.5 years and females with 84.6 years – up by 1.5 years in the past decade and over 10 years in the last 50 years. However, these increasing lifespans also open up the risk of not having enough money to fund retirement.

Longevity risk – the risk of potentially outliving one’s retirement savings – is an ever-increasing possibility that should be addressed early in the development of a retirement plan, because it can serve as a guide in calculating how much you would need in retirement based on your objectives.

Longevity risk and retirement income planning should ideally be dealt with together to be better prepared for your golden years.

Consider applying the following strategies to address longevity risk:

  • Minimise expenses
  • Contribute more
  • Invest outside super
  • Work longer
  • Avail an annuity

Nest Egg explains how doing the things above can help you minimise longevity risk in retirement.

Minimise expenses

Minimising expenses is a good money-saving habit that can help make your retirement funds last longer, and you can also apply the practise both before and during your retirement.

The first thing you need to do is to list all your recurring expenses and assess whether they are necessary or not. Once you have determined which expenses are non-negotiable, consider finding ways to lower your bills. You may also consider creating a budget and spending plan so that you can keep track of incoming and outgoing money.

For instance, since paying your utility bills is necessary for your day-to-day living, you may try to negotiate a better deal with your service provider. Likewise, you may minimise your grocery bills by listing down what you need based on your current stock before heading out.

By cutting down your expenses, you will be able to allocate more money for your emergency fund or retirement savings and investment.

Likewise, minimising expenses during your retirement years can help stretch the life of your retirement fund.

Contribute more

If you don’t wish to delay your retirement, you may always consider making additional contributions or maximising your annual concessional and non-concessional contributions. It’s recommended to maximise contributions as early as possible during the accumulation phase so that your principal investment can grow faster and may result in bigger returns.

However, you may also take advantage of the catch-up or carry-forward contributions if you have less than $500,000 in your super at the beginning of the financial year and still have unused concessional contributions.

By contributing more to your super, your larger principal investment can take advantage of the time value of money and potentially reap the benefits of the power of compound interest for a longer period, and this may result in a larger nest egg in retirement.

Invest outside super

Superannuation was established to secure the retirement benefits of Australians through employer and voluntary contributions; however, not all super fund members are able to accumulate enough wealth to have a financially secure retirement. Likewise, some may find the contribution limits and withdrawal rules under super laws quite limiting in wealth creation.

In this regard, experts suggest investing outside super as a means to supplement the income stream from super in retirement.

Investing outside super allows you to apply a different investment strategy with your extra money. For instance, if you selected a balanced portfolio with your super as a means to minimise risk exposure, you may consider investing in high-growth assets outside of super to reap potential benefits.

Work longer

There is a growing number of retirees who return to the workforce for various reasons, which include earning extra income to supplement their pension. If you feel that your super and other investments may not be able to fully support your retirement years, delaying your retirement date can potentially help you increase the amount in your nest egg.

There are two ways that staying employed longer can help longevity-proof your retirement portfolio:

  1. Staying in the workforce longer may give you the opportunity to contribute more to your super through employer salary guarantee contributions.
  2. A longer employment means you actively receive income while also being given the opportunity to make voluntary contributions.

While delaying your retirement may not be a part of your plan, it’s a viable option to consider if only to increase the life of your retirement savings.

Avail an annuity

Another option you may consider is to avail an annuity that would pay out in the early stages of your retirement or as a supplement to your retirement income until a specific age.

Annuities, also called fixed-term or lifetime pension, are financial products that pay a guaranteed income for a period of your choice, and this may be for a set number of years or until your death. The amount you receive and the length of time you are paid will depend on your choice on the day you buy the annuity.

Annuities can be a good option to supplement your super or ensure that you will still receive an income in retirement even if your super runs out. However, there are certain limitations, such as not being allowed to take out a lump sum or choose how your money will be invested, so it’s best to shop around before committing to a retirement income product.

If you’re having difficulty or think that you need more information and guidance on how to minimise longevity risk, seek advice from a licensed professional who can explain the products in detail and take your personal circumstances into consideration.

This information has been sourced from the Australian Taxation Office, Australian Bureau of Statistics and IOOF.

Longevity proofing your retirement portfolio
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