Two takes on longevity risk

Welcome to the very first in what promises to be a wonderful journey of all things retirement and what we like to call “realising your dream”.  We regularly write on the Realise Your Dream blog and it’s our intention to share some of our most popular articles with the Evalesco community right here, under the banner Tealey and PK.

To get things underway, one of the major concerns for people when they retire is, ‘how long will my savings last in order to support my lifestyle of choice’?

This is what we often refer to as ‘Longevity Risk’, or the risk of outliving our money.

My good friend and colleague PK has written about this issue in a previous blog and there have been many articles in the media about this subject… and I have no intention of adding to that list.

However, I would like to consider the risk from a health, rather than the usual wealth, perspective.

I fear that for a growing number of people, longevity will NOT be a risk.

We are constantly advised via the various media outlets of the importance of putting money away into savings or superannuation to ensure that we are able to enjoy our retirement – and this is certainly the major focus of banks, financial planners, industry funds and the like.

However, I would say that we all need to take one step back and remember our health in retirement is just as important as our wealth and, in the same way that we are diligent about saving for retirement while we are working, we need to also focus on our health during our working life.

Longevity – only a risk for some!

I believe it is very clear that a person’s health experiences later in life are affected by their behaviours during their younger years.

So, you may well ask ‘what is the health experience that could reduce longevity risk’? It could have something to do with our growing waist-lines:

  • More than five million Australians are obese;
  • If weight gain continues at current levels, by 2025, close to 80% of all Australian adults and a third of all children will be overweight or obese;
  • Obesity has overtaken smoking as the leading cause of premature death and illness in Australia;
  • Obesity has become the single biggest threat to public health in Australia; and
  • On the basis of present trends, by the time our kids reach the age of 20 they will have a shorter life expectancy than earlier generations simply because of obesity.

I recently had the good fortune to attend a conference were the nutritionist, Dr. Joanna McMillan was speaking. She also spoke about the obesity epidemic and emphasised the need and importance of a balanced diet and the dangers of a sedentary life.

A balanced diet is not rocket science – if we think about it, it is just common sense. You should include vegetables and legumes, fruit; bread, cereals, rice, pasta and noodles, lean meat, fish, poultry, eggs, nuts and tofu, milk, yoghurt and cheese.  I am certainly not qualified to advise on the quantities. I will leave that to your own research but I do know that fizzy drinks, chocolate, energy drinks, wine, doughnuts and chips are not a separate food group.

Inactivity is the second silent killer which can contribute to a person’s shortened life expectancy.  Evidence is emerging that sedentary behavior, such as sitting or lying down for long periods of time is not good for your health.

Technology has made our lives easier, but also made us lazy. There are fewer of us doing manual work – we outsource. Many of us have jobs which involve very little physical effort. Doing housework and pushing a trolley up and down in the supermarket does not qualify as sufficient physical activity.

As a general guide, we should be looking to achieve 150 minutes of moderate intense physical activity in a week. What is moderate intense physical activity? It is an activity which raises your heart rate, leaves you still able to speak but not able to sing – which could be a blessing.

I am not qualified as a doctor or nutritionist but I believe most of what I am saying is very basic and common knowledge. But before you feel inspired and start your vigorous exercise program, please take the time to speak to your GP and get the all clear.

If this blog is not enough to make you stop and think about your own lifestyle then remember this little bit of extra, more enticing piece of information – all the research indicates that for those over the age of 65 who remain healthy and active,  also maintain a healthy sex life – food for thought….maybe!

Is $1,000,000 enough?

Thank you for that scintillating discussion about longevity Tealey, and with that in mind I want to touch on a topic that isn’t too far from yours – is $1,000,000 enough? In the few weeks, there has been a flurry of activity around some articles appearing in the mainstream media that suggest that a retirement nest-egg of $1,000,000 is not sufficient to provide for a comfortable income in retirement.

You might recall from previous blogs that figures modelled by the Association of Superannuation Funds of Australia (ASFA) suggest that a comfortable retirement lifestyle will cost a couple $58,364 and a single $42,604.

These figures were current for the December 2014 quarter.

The current spate of comments about $1,000,000 being inadequate are attributed to Jeremy Cooper, the Chairman of Retirement Income at Challenger (Australia’s largest provider of annuities). He also chaired the review of Australia’s superannuation system which tabled its final report in June 2010.

However, before you resign yourself to the thought of having to work forever, these comments need to be put into some context.

An annuity is an investment product that provides a regular income in exchange for a lump sum. The income is paid at agreed intervals (e.g. each month) for the term of the annuity. This may be for the life of the annuitant, or for a fixed number of years. Annuities are generally long-term contracts that could be paid for 20 years or longer.

From an investment perspective, annuities tend to be conservatively managed and the rate of return offered is generally close to interest rates available in the broader financial community. With the interest rate for a lifetime annuity issued to a 65 year old currently being a little over 3%, an annuity purchased with $1,000,000 will provide an agreed income (indexed in line with inflation) of around $32,000 in the first full year. This is roughly the same as the full age pension for a couple and is based on current data provided by Challenger Australia.

The reason for the low rate of income being quoted for annuities reflects the historically low interest rates available in Australia at the current time and any guarantee of future income comes at a price.  However, the reality is that it is unlikely a person with a $1,000,000 retirement nest egg will be investing all their savings into an annuity style product.

Retirement savings will generally be invested in a range of investment asset classes and types that provide for capital growth and income. Such retirement savings, even when invested in a managed fund or through a superannuation fund will generally include exposure to fixed income (bonds), cash, shares and property.

For some retirees, investing a portion of their savings in an annuity might be an appropriate strategy, but it shouldn’t be their only strategy.  A balanced portfolio spread over a number of asset classes will, over time, provide a return that exceeds the current cash rates by a respectable margin. A return, over time, from a balanced portfolio of 5% to 7% per annum should not be difficult to achieve and this would provide a real return of 2% to 4% after taking inflation into account.

The real secret to successful retirement planning lies in having a plan in place and receiving good quality financial advice that addresses strategy and management of investments, as early as possible.   

Note that this post first appeared on the Centrepoint Alliance blog, Realise your Dream, which can be found here: http://blog.cpal.com.au/realiseyourdream/. We thank both Tealey and PK for their ongoing permission to share their fabulous posts with the Evalesco community.

It’s my job here at Evalesco to work with my clients to maximise the likelihood that they achieve what is important to them in their life.