Need to know
- A new lifespan calculator gives you some guidance around how long you're likely to live
- The tool can be used alongside more widely available longevity calculators, which show how long your savings are likely to last
It may seem morbid to think about when you'll die, but it's an important thing to consider when mapping out your retirement years. If you want your retirement income outside the age pension to continue for the likely term of life, having more information about your expected lifespan can help.
This is where a new calculator developed by Optimum Pensions comes in. It aims to give you a more accurate prediction of your lifespan than existing tools.
The company does offer lifetime pensions, but says the calculator is 'product agnostic' – that is, not connected with any of its particular products – and is designed primarily to educate consumers about lifespan.
There are two different versions of the tool available: one gives a general prediction of your lifespan; the other gives a more detailed estimate that takes into account lifestyle factors such as whether you smoke, exercise and eat healthily.
A more up-to-date lifespan calculator
Some super funds already offer simple calculators that predict your lifespan, based on census data. A 2018 research paper also suggests that many financial planners get life expectancy data from Australian Life Tables.
But David Orford of Optimum Pensions says such calculators rely on old figures. "Life expectancy tables are always out of date because they're based on the census taken years earlier," he says. "All of the medical improvements over the last 20–30 years are significant in increasing lifespan, and people are living longer."
The life expectancy tables may also give you a lower figure than is realistic because they include people born with serious health conditions that reduced their life expectancy. But people who reach retirement age in reasonable health have a life expectancy that's greater than average.
Limitations of a lifespan calculator
Some other life expectancy calculators incorporate more detail than the Optimum Pensions tool. They may, for instance, ask whether you have a pet, whether you have made new friends in the past year, whether you play word games and how often you eat processed foods.
There are some external factors that no calculator can factor in: Diseases, pandemics, accidents and luck
The Optimum Pensions tool incorporates less detail and is intended to be reasonably quick and straightforward to use.
The calculator's disclaimer notes that there are some external factors that no calculator can factor in: diseases, pandemics, accidents and luck. It also warns that the calculator shouldn't be used by those with a life-threatening medical condition.
Building up, not drawing down
The Retirement Income Review (RIR) pointed out that there's been too little guidance for Australians on how to manage and make the most of their retirement income.
"In retirement, there's a multitude of new decisions you've never really faced before," says Adam Butt, an associate professor at the Australian National University. "Longevity is just one of the suite of new things a retiree has to think about."
Nga Pham, a research fellow at Monash University, says: "There is a lot of emphasis on the accumulation phase (of super) but not much focus on the decumulation phase. Individuals have to learn what the risks are and how to manage that risk, and they have to do that by themselves."
With this in mind, more sophisticated planning tools can relieve the uncertainty around your post-work years, help you manage your retirement income better and, ultimately, enjoy a better lifestyle.
Trying the calculator
I answered some basic questions about my health for the calculator and found my predicted lifespan with a 50% confidence level was 87. With a 95% confidence level, it jumped to 102. Note that this result does not mean I'm likely to live until I'm 102 – instead it means there's only a five percent chance I will outlive this age.
The Retirement Income Review found that most retirees die with the bulk of their pre-retirement wealth intact
The more information you have to guide your retirement planning the better, but it's important to take the calculator's results in context.
There are some other points to keep in mind:
- Many people underspend in retirement because they're wary of future costs they may face. The RIR found that most retirees die with the bulk of their pre-retirement wealth intact.
- The Age Pension will continue giving you a retirement income.
- Which retirement products are best for you will depend on your savings, your desired income, what you want from retirement, and other factors.
An important concept in retirement planning that the new lifespan calculator incorporates is confidence levels.
"[They're] something that hasn't been part of most calculators," says Butt.
"If [the calculators] don't include information like confidence levels, you don't create a culture where people understand uncertainty. That's not just relevant for lifespan; the other place where this is relevant is investment risk."
Butt also believes that this part of the calculator has a valuable role in helping people understand the concept.
A 2018 study showed that financial planners typically use a life expectancy figure that has only a 50% confidence level. This means there's a one in two chance you'll outlive the predicted age.
Research into retirement planning commissioned by Super Consumers Australia found a strong preference for information being presented at the highest confidence level.
Lifespan calculators and longevity calculators
Pham and Butt believe the lifespan calculator could be productively used alongside a longevity calculator. The latter aims to predict the age at which your savings would run out.
"The post-retirement balance calculators are driving you towards thinking how long your money will last for, so bringing that together with something like a lifespan calculator at least adds another piece of that puzzle," Butt says.
"If my balance calculator tells me my money is going to run out at [age] 92, the lifespan calculator gives me some context for whether that is an appropriate number or not."
Pham says both pieces of information are useful. "If I'm a person looking to see how I should manage my retirement savings, I need to know the answers to both," she says.
This particular calculator aims to increase awareness of annuities, or lifetime pensions, which haven't traditionally been widely purchased in Australia.
There are a range of annuities with different features, but generally, an annuity (or lifetime pension) gives you an ongoing income in exchange for paying a lump sum.
You can use an annuity to help you 'smooth out' your income across retirement. They offer less flexibility than an account-based pension, but more certainty as to how long your income will last. For example, a life (or lifetime) annuity gives you income (on top of the age pension) for as long as you live.
According to ASIC's Moneysmart guide, downsides to annuities include your money being 'locked away' and not being available for a lump-sum withdrawal.
One option of many
Buying an annuity is just one option for managing your retirement income. You can instead choose an account-based pension or other investment, or some combination of these depending on your circumstances.
The age pension is already providing substantial longevity risk insurance for most AustraliansGrattan Institute
The government's Retirement Income Covenant, scheduled to begin in July 2022, should make retirement income products better suited to retirees' needs. It will compel super funds to consider how they can help members balance maximising their retirement income with having some flexibility to access their money.
The Grattan Institute has pointed out that the age pension is "often overlooked" in the discussion of retirement products and is "already providing substantial 'longevity risk' insurance for most Australians".
This is an important point. Coverage of retirement planning in the media often talks about retirees 'running out of money'. But if you're eligible for the age pension, you'll always have this income.
Butt says these calculators could be developed further to help people make decisions about what to do with their money in retirement.
"A calculator could show the impact of these types of [retirement income] products in terms of your expected income in retirement and – this is the key thing they don't have at the moment – the volatility of that income."
Pham says super funds themselves could use these personalised types of calculators to help their members make decisions. "The super funds could come up with a model and combine the two answers together of how long (fund members) will live and how long will their savings last," she says.
"That would be very beneficial because right now it's a lot of work for members to understand and manage the risk. But again, the issue is how to make it simple for members to understand."
Making retirement planning easier
Super Consumers Australia director Xavier O'Halloran says the next step is to give people an easy way to compare retirement products.
"We've now got a super fund comparison tool that makes it much easier for people while they're working to find a quality super fund," he says.
"For those entering retirement there is a real lack of independent, quality information on how these products work and how they stack up against one another.
"If we don't look to make retirement planning easier, retirees will be left in the dark about how to best manage their retirement savings.
"Ultimately, this will see people having a much lower standard of living than they can afford in retirement."