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Can you afford to live to 95?

May 2019


While our mortality is a grim subject, and an impossible one to forecast on an individual basis, we have statistical data that shows the average life expectancy of Australians is growing, and fast!

Few people think they’ll live to 95, but on current numbers women currently aged 65 have a 17 per cent chance of reaching that ripe old age, and men have a 9 per cent chance.1

Most striking is that for a male and female couple, both aged 65, it appears there is a 49 per cent chance that at least one will live until the age of 91, and a 24 per cent chance that at least one will live to the age of 95.1

Almost a third of your life in retirement

Longevity is increasing, but your retirement savings are staying the same.

For those retiring today at the age of 65, a common reference point is that they’ll need their funds to last until they’re 85. What happens if this pushes out 10 years longer?

Everybody’s situation is different, but when you’re in your eighties, the last thing you need is to be second-guessing your financial security.

Now is the time to reassess your portfolio, and your allocation to shares and other growth assets. The critical question shifts from how big is the nest egg at the start of retirement, to being, what are your income needs for, potentially, the next 30 years?

Bridging the funding gaps

There are several steps you can take to ensure you have sufficient income during retirement. Common measures include spending less, using financial products to manage longevity risk or pursuing higher returns by investing for growth.

“Growth assets: Investments that focus on generating growth with some potential for income. These assets tend to have higher volatility, ie. their value will rise and fall more often, than defensive assets. Examples of growth assets are shares and property.”

For those that have retired, the focus should be on establishing income requirements over the coming decades and minimising the risk of running out of money.

Conservative asset allocation comprising of cash and bonds will result in lower investment volatility. However, it may also lead to dwindling financial reserves as your returns may not keep pace with inflation.

The age-old issue of risk

As with most financial decisions, it’s a question of balance. A sudden shift toward growth assets when transitioning to retirement can be precarious. This is when the portfolio has its greatest exposure to ‘sequencing risk’.

“Sequencing risk: It’s all about timing. If there is a period of market weakness just prior or just after your retirement date when your nest egg is at its peak and you start drawing an income, the impact on your portfolio can be felt for many years to come.”

On the flip-side, as we get older, we tend to become more conservative. While this may be good protection against sequencing risk, it may also leave your portfolio growing at too-slow-a-pace.

So how do you navigate this ‘danger zone’ when uncertainty abounds—we cannot predict market performance, we cannot forecast our mortality, or know how healthy we will be.

Revisit your financial plan

The answer may lie in taking a more goals-based approach. Rather than blindly focussing on the size of the pot at retirement, it’s better to analyse how much income you will need.

Given that markets are dynamic, and prone to uncertainty, taking a dynamic approach to your asset allocation allows a higher allocation to shares when markets are cheap, and adjusts this allocation when markets are expensive. Sounds logical to invest this way, but markets don’t always rise when they’re cheap or fall when they’re expensive. Investing isn’t a precise science.

This is something you can discuss with your financial adviser and assess the approach to investing that is best suited to your financial situation. The tendency to take a conservative position and dramatically reduce your allocation to shares may leave you without sufficient income.

That’s not to say you shouldn’t have a safety net. A useful strategy may involve setting some cash/liquid assets aside to cover your expenses for a few years. This will enable you to weather a downturn and avoid taking a loss on your growth assets should they fall.

Everyone’s goals are different

While your retirement years may be your golden years, there are still trade-offs, just like in the rest of life. You need to make an active plan that takes into consideration a realistic assessment of both your longevity and your income needs.

To achieve your income goals, you might want to consider keeping more shares and other growth assets in your portfolio than previous generations.  That’s a decision you should make with a qualified financial adviser, but it doesn’t have to be daunting. It can be achieved with an asset allocation that changes according to whether markets are expensive, or whether opportunities are present

There’s a wide-array of options available to you, offering flexibility and adaptability. And that’s vital when the future is uncertain and when the likelihood of your living to 95 is greater than ever.

1 NAB Asset Management, Australian Bureau of Statistics (ABS).

Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (NAB) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060. NAB does not guarantee or otherwise accept any liability in respect of any financial product referred to in this communication.
The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.
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