Shifting your mindset and strategy to meet the reality of living longer
Years ago, a ‘set and forget’ approach to retirement might have been all you needed to enjoy a comfortable lifestyle. But times have changed and being strategic and considered about your money is the best way to look forward to a less stressful future.
Studies show that as humans, we tend to have a blind spot when it comes to planning ahead. We treat our future selves like strangers, placing a higher value on immediate gratification, rather than planning for tomorrow. It’s the reason why many of us can find it difficult to save, exercise regularly or eat less sugar.
The average 65-year old underestimates their life expectancy by almost 5 years.
A reality check on retirement – there’s a good chance you’ll live longer than you think
Perhaps the biggest blind spot we have is how long we’ll spend in retirement. In the 25 years between 1992 and 2017, the most common age of death increased by ten years, from 78 to 88.
Life expectancy rates published by the Australian Bureau of Statistics take into account the chances of survival until a certain age, but they don’t account for mortality improvements that are enabling each generation to live longer than the one before. Once this trend is factored in, a more realistic life expectancy of 87 for males and 89 for females emerges. That’s potentially 30 years of retirement you’ll need to fund. And if you retire sooner than you’d planned, because of medical reasons or redundancy for example, you could be looking at an even longer retirement.
|Average life expectancy
|From age 65
| From age 65 with mortality improvements
Probability of a 65-year old male surviving to different ages
As shown in the table above, a 65-year old male has a 50% chance of reaching age 88. There is also a 25% chance of living to 93, and a 10% chance of living past 97.
If you think that life gets less expensive as you age, think again. Your social life may indeed slow down in your 80s and 90s, but research from the Australian Superannuation Fund Association (ASFA) found that older retirees face increased costs for medical expenses, care and assistance in the home. According to the Centre of Excellence in Population Ageing Research (CEPAR), over half of 85-year old retirees are receiving assistance, and one quarter are living in an aged care facility. On top of this, out-of-pocket expenses for major medical procedures and ongoing medical expenses can also increase with age.
‘Safety net’ income is secure income that is set aside to help you afford essential needs for your lifetime, regardless of how share markets perform.
A longer retirement means a greater focus on safety net income
With potentially up to three decades to plan for, retirement requires a greater focus on safety net income to help you cover the essential costs of living. Income from investments like shares isn’t guaranteed, and income from account-based pensions usually isn’t either. Income payments from the majority of account-based pensions will stop once your initial investment runs out. Whereas safety net income from a lifetime income stream will be paid to you however long you live, regardless of what happens in the share market. Your safety net income may also include payments from the Age Pension if you’re eligible.
Retirement income that lasts for as long as you do
From a money point of view, retiring means shifting your mindset from saving and growing your nest egg, to protecting your money and making sure you have enough income for the rest of your life. In this guide, we show you how boosting your safety net income provides you with more certainty and peace of mind in retirement.
Test your knowledge of step one
One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.
Q1. The average 65-year old underestimates their life expectancy by: