Do not let longevity risk fall by the wayside
It is vital for financial advisers to conduct discussions around longevity risk with their clients, which they can often neglect as investment risk and inflation risk takes precedence, a consulting actuary warned.
Accurium self-managed superannuation fund (SMSF) technical services manager, Melanie Dunn, told the 2017 SMSF Association conference that longevity risk was a difficult topic to raise because the discussion revolved around when a person would die.
Dunn said it was a known unknown with two elements: survival risk, which was the risk of living longer than expected and outliving one’s savings, and mortality risk, which was dying earlier than expected without utilising all of one’s retirement savings.
Dunn said the timeframes advisers assumed about their clients could be material to the advice they provided despite the difficulty of uncertain timeframes that was inherent in longevity risk.
“In our retirement planning it’s important we don’t use life expectancy from birth but instead use life expectancy from our clients’ retirement age or their current age if they’re already retired,” she said.
According to the Australian Life Tables (ALTs) produced by the Australian Government Actuary based on data from the 2011 National Census, a male born today would live on average to age 80 while a female would live to age 84.
However, a female retiree aged 65 today would live to age 87 while a male would live to age 84.
SMSF trustees, who were generally wealthier clients, were expected to live around three years longer than average due to the correlation between wealth, education, and longer lifespans, according to Accurium’s research based on a database of 65,000 SMSFs.
“You might think this means that our SMSF trustees hold greater longevity risk. But longevity risk isn’t that you expect to live a long time, it’s actually the risk that you live longer than you expect. It’s in the uncertainty,” Dunn said.
Advisers must calculate clients’ life expectancies and ensure they have allowed for longevity risk in their retirement modelling, and proceed to articulate this to clients.
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