Australians are living longer than ever before. While this is fantastic news, a longer life gives rise to longevity risk – the risk of living longer than expected, and running out of money as a consequence.

Here, we break down Australia’s life expectancy estimates, explain longevity risk and the financial implications of living a longer, healthier life.

Life expectancy

Australia has one of the highest life expectancies in the world, ranking fourth amongst OECD countries. The most recent data, published in 2022, showed that Australian men had a life expectancy of 81.3 years of age at birth, while women were expected to live four years longer to 85.4 years old.

These estimates are a significant increase on figures from six decades ago, and a drastic rise on the prior century. In 1900, the average Australian male had a life expectancy of 51.1 years, while females were expected to live to 54.8. By 1962, this had increased to 67.9 for males and 74.2 for females.

Why has life expectancy improved so much?

Life expectancy is a measure taken at birth. This measurement averages the mortality rate – the age at death of an individual – across an entire population.

Improved medical knowledge and technology, as well as availability to healthcare, better living conditions and economic growth has facilitated longer and healthier lives. However, perhaps the single largest factor that has driven the drastic improvement to life expectancy at birth over the last century is the decline in Australia’s infant mortality rate.

A high infant mortality rate lowers the average life expectancy of an entire population. This means the 1917 life expectancy that sat in the early-to-mid 50’s can be deceiving. People were still living comfortably into their 70’s and 80’s, but the high rate of individuals passing prior to their first birthday dragged the life expectancy figures down.

As of 2022, the infant mortality rate was 3.2 deaths per 1,000 live births, which is one of the lowest rates in the world. This is a decrease from 1962 of 20.4 per 1,000, and 55.9 per 1,000 in 1917 (the earliest data available).

To confuse matters further, while life expectancy statistics generally refer to life expectancy at birth, people’s life expectancy actually increases as they get older.

For example, a male born in 2022 has a life expectancy at birth of 81.3 years, while a female is expected to live to 85.4. By the time they turn 65, their life expectancy will increase to 85.2 for the male and 87.8 for the female. At 85 years of age, their life expectancy ventures into the 90’s, reaching 91.5 and 92.5 respectively.

How long will I live?

It depends. To borrow a phrase to which just about every investor is familiar – everyone’s circumstances are different. Presently, however, people are consistently reaching ages that would have been considered impossible a century ago.

The oldest Australians ever, lived to 114. This occurred in 1983, 2002 and 2017. While longevity has increased dramatically over previous decades, the maximum age at death has not.

Therefore, it’s highly unlikely an individual lives to 110, but people are increasingly reaching triple figures. In 2021, one in 72 deaths were individuals aged 100 or older, compared to one in 1,214 deaths in 1964.

Longevity risk

Australians living longer is good news, but there are financial considerations attached to a lengthy life. Namely, longevity risk, which is the risk that individuals will live longer than expected, with the primary implication of potentially outliving savings.

Implications of a longer life

Based on when an individual can claim the pension in Australia, the typical age of retirement is broadly considered to be 67. However, the average age of those who retired in 2022 was 64.8 years.

As an example, take a woman born in 1962 who intends to retire at 65 years of age with $1 million in savings. At birth, her life expectancy was 74.2 years of age. In this hypothetical, if the woman were to live to her life expectancy at birth, she would only need to stretch her retirement savings for nine years.

However, once the woman reaches retirement and turns 65, her expected age at death has increased to 80.7 years. This means she has an estimated 16 years to live and extend retirement savings.

If the woman is fortunate enough to exceed expectancy estimates and live to 95, her initial $1 million in savings would need to last for 30 years. A common guideline is to plan for roughly 30 years of retirement.

Making your money last longer

Everyone is different and so are their circumstances and financial goals. However, capital preservation in retirement is essential to mitigate longevity risk and ensure a retiree can maintain their lifestyle until the end of their life.

Investing in retirement

There are retirement-specific investment products, such as annuities, which can provide steady income in retirement. Retirees also often allocate portions of their portfolio to defensive investments, such as bonds and terms deposits.

The 4% rule, developed by US financial adviser, Bill Bengen, forms the basis of many retirement plans across the world. The 4% rule outlines a ‘safe’ withdrawal rate to ensure an individual or couple does not run out of money. The rule was developed based on the assumption that a portfolio will have a 50% allocation to bonds and 50% to shares.

Investment products that pay regular income, often with the potential for capital preservation or modest growth are also popular among retirees. Trilogy Funds offers a range of property-backed investment products designed to provide investors with consistent income.

Property-backed investment products

The Trilogy Monthly Income Trust (Trust) is a pooled mortgage investment, providing investors with exposure to returns available through loans secured by registered first mortgages over Australian property. The Trust has delivered monthly returns to its investors since its launch in 2007 while maintaining a fixed $1.00 unit price¹.

Alternatively, the award-winning Trilogy Industrial Property Trust (Industrial Trust) holds a diverse portfolio of industrial properties located in established regional and metropolitan precincts. The aim of the Industrial Trust is to provide investors with regular income and the opportunity for capital growth over the long term.

Of course, everyone’s circumstances and financial goals are different, and past performance is not a reliable indicator of future performance.

Retirement is an exciting time, and so too is the prospect of living longer. However, longevity risk is an added consideration for individuals and couples nearing or in retirement. To learn more about funding retirement, visit https://trilogyfunds.com.au/funding-the-three-phases-of-retirement/.

 

¹ Past performance is not a reliable indicator of future performance.

This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the management investment schemes mentioned in this <<medium>>. Application for investment can only be made on the application form accompanying the relevant Product Disclosure Statement (PDS) and by considering the Target Market Determination (TMD) available at www.trilogyfunds.com.au. The PDS contain full details of the terms and conditions of investment and should be read in full, particularly the risk section prior to lodging any application or making a further investment, together with the TMD. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.