Solving the longevity equation

With Australians living longer than ever, retirees face the complex task of balancing their desired lifestyle against an uncertain lifespan while navigating market volatility, inflation, and changing healthcare needs.

This equation becomes even more daunting when considering that a retirement portfolio must be resilient enough to provide income for potentially 30+ years yet flexible enough to adapt to life's unexpected turns.

This is where financial advisers play a crucial role. By understanding each client's unique circumstances, aspirations, and concerns, advisers can help solve this equation through strategic planning, product selection, and ongoing portfolio management. Their expertise helps retirees build confidence in their financial future, knowing they have a comprehensive plan that balances the need for guaranteed income, growth potential, and risk protection throughout their retirement journey.

Given the importance and complexities of the decisions that will need to be made to secure one’s financial future, it is concerning that according to research from the Association of Superannuation Funds of Australia (ASFA), only one in two Australians will seek out information on preparing for retirement.

Understanding and managing longevity risk

Financial advisers play a critical role in helping clients understand and manage longevity risk. A good starting point would be to help clients understand two key numbers as they approach retirement: how many more years they are likely to live and the probability of living longer.

The Optimum Pensions Lifespan Calculator offers financial planners a powerful tool to help estimate your client's personal life expectancy and possible planning horizon. The calculator considers various personal factors, including health and lifestyle choices, marital status for couples planning and your client’s risk attitudes and desired confidence levels.

Once financial planners have helped their clients understand the longevity equation, the next step is to help them solve it.

Today's retirement landscape offers more product options than ever before, including new lifetime income products that provide income for life, even if retirees live past 100. These products provide options to retirees who, as shown in the 2019 National Seniors Social Survey, are concerned about outliving their savings and investments.

A comprehensive retirement strategy

Modern retirement planning requires moving beyond conventional product mixes. No single solution serves as a "silver bullet" – successful retirement strategies often combine multiple products to help clients solve the retirement trilemma. That is, balancing the competing objectives of:

1. Maximising their expected retirement income.
2. Managing expected risks to the sustainability and stability of their expected retirement income.
3. Having flexible access to expected funds during retirement.

When financial advisers are helping clients balance these objectives, two questions need a suitable answer:

1. How much should be used to purchase a lifetime income product?
2. How much investment risk should be taken with the part that remains invested?

The answers to these questions must go beyond the merely financial and account for each client’s preferences and behavioural tendencies.
How can financial advisers best use these new tools and products to help their clients solve the longevity equation? That question led me to write my book Retirement Income for Life – Solving the Longevity Equation.

It provides practical guidance for incorporating lifetime income products into retirement portfolios. It includes detailed case studies demonstrating how advisors can create comprehensive retirement income plans based on individual client objectives.

Looking ahead

With 670,000 Australians planning to retire in the next five years, the financial planning community must embrace proactive, longevity-focused retirement planning. These Australians may well be living longer lives than previous generations, so they need to plan for a longer retirement.

Solving the longevity equation might be complex, but by using the latest tools to help clients understand how long they may live and the products available that eases their concerns over potentially running out of money at their most vulnerable stage in life, advisers can make it easier for their clients to understand the challenges and make informed decisions that gives them the peace of mind to enjoy their retirement.

This is where advisers can add significant value to their clients, both financially and emotionally.

David Orford, managing director of Optimum Pensions.