More and more Australians are worried about running out of money in retirement. Could a retirement income product using pooled longevity risk be the answer?
A recent Finder survey found that three out of five Australians (63 per cent) are concerned about outliving their savings in retirement.
A concerning 28 per cent said they don’t believe they’ll ever be able to stop working.
With Australia’s average life expectancy now sitting at 83.9 years, the amount needed to last until your death keeps growing. The current cost-of-living crisis also shows us that costs can increase substantially at any time.
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This makes planning for the future difficult. You can plan your savings around living to the average age, but you have a 50 per cent chance of outliving the average age, meaning your funds will dry up and you will be forced to rely on the Age Pension.
But you could also die before reaching the average age, meaning if you’ve planned to live to 83 but pass away at 75, you’ve likely been spending less than you could have been in your final years.
This is where a retirement income product that uses what’s called ‘pooled longevity risk’ can be very useful. These products group members of the same age together, sharing the risk of early death or outliving savings among them.
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This provides a more reliable distribution of ages at death and as the pool grows larger, the distribution of lifespans becomes more even and predictable. With more members, the risks associated with longevity uncertainty are reduced to virtually nothing for each individual in the group.
The benefits of this risk distribution can be passed on to fund members in various ways. Super funds can provide bespoke lifetime income products for group members through what’s called a group self-annuity (GSA).
A simple GSA structure usually involves the fund setting the initial annuity payments based on assumptions about expected mortality rates at the time, investment returns, fees and costs.
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Then in future, subsequent payments will be adjusted to reflect any changes to the average lifespan and actual individual investment.
Some GSAs are designed in such a way that if a retiree passes away before receiving annuity payments at least equal to their initial investment, then the balance of their purchase price is refunded to their estate. Others include the ability to pass the GSA arrangement to your spouse upon death.
Do you think pooling longevity risk could help you? Would it make it easier to plan for retirement? Let us know in the comments section below.
