Understanding longevity risk in retirement

Australians are living longer than ever before due to a combination of factors including improved healthcare, better living conditions and over all better quality of life. With this longevity comes the challenge of ensuring financial security throughout a longer retirement.

Data from the Australian Bureau of Statistics (ABS) shows that life expectancy at birth is now 81.1 years for males and 85.1 years for females¹. Despite the increases in these averages, many Australians will live well beyond these ages, making planning for your retirement income more important than ever. 

What is longevity risk?

Longevity risk refers to the possibility of outliving your savings. Living longer allows you to enjoy the fruits of life for longer but it also means planning carefully to ensure your savings last as long as you do. For Australian retirees, this is especially important, as the Age Pension alone may not be enough to cover all living expenses over an extended period.

According to the Challenger Retirement Happiness Index², 72% of Australians aged 60+ report that the rising cost of living has adversely impacted their financial security, with 34% admitting the impact was significant. This highlights the importance of planning for longevity risk to maintain financial confidence in retirement.

Building financial security for the future

To ensure a comfortable and secure retirement, it’s important to take proactive steps to manage longevity risk. Here are some key considerations:

1. Understand how long your retirement savings may last  

Knowing how long you might live can help you plan your finances to last throughout retirement. Factors like health, lifestyle and family history can play a role in estimating life expectancy.

2. Understand your income sources

Retirement income can come from a mix of sources, including the Age Pension, superannuation, personal savings and investments. For many Australians, the Age Pension alone may not be enough to cover all living expenses, especially if superannuation or other savings run out. Adding a source of regular income such as a lifetime annuity to your retirement income plan can help you manage the risk of outliving your savings.

By using some of your super or other money to set up a lifetime income stream, you could create an additional layer of secure income that complements the Age Pension, if you are eligible. This approach helps to provide peace of mind by ensuring you have a regular source of income that can cover essential needs throughout your life. This can form part of a comprehensive retirement income plan.

3. Use planning tools and resources

• Make a budget
• The Age Pension is a key safety net for many Australians. Consider how it works, including eligibility and its role alongside superannuation and lifetime income streams.
• For personalised guidance to help you make informed decisions about your finances, consider accessing free services like the Financial Information Service (FIS) offered by Services Australia or see a Financial Adviser.

The benefits of financial security

Financial security can transform retirement into a time of freedom and fulfilment, allowing retirees to focus on what truly matters. With a lifetime income stream you can enjoy meaningful activities like traveling, pursuing hobbies or spending quality time with loved ones without the stress of financial uncertainty.

The Challenger Retirement Happiness Index² reveals that 41% of Australians aged 60+ see “having enough money to enjoy retirement” as essential for happiness, while 33% value knowing their money will last. This financial confidence provides the foundation for a retirement filled with confidence, happiness and peace of mind.

Planning for a confident retirement

A well thought out retirement plan provides the confidence to enjoy life without the constant worry of running out of money. By understanding longevity risk and taking proactive steps, you can feel more confident that your retirement income will last as long as you do.
 

^{1 Life expectancy, 2021 – 2023 | Australian Bureau of Statistics}

^{2 Challenger Retirement Happiness Index}

^{Source: Challenger}