A condensed version of this letter was published in the Australian Financial Review on Tuesday April 28, 2015
As Christopher Joye pointed out in ‘Why you're likely to outlast your nest egg’, Smart Money 24 April, there is a real chance of many Australians running out of money during their retirement.
In fact, we know one in three retirees are concerned about longevity risk and most don’t have a formal plan to combat it.
What the article failed to reveal was there are options that will provide an income for life from your superannuation savings; that is, your nest egg can last for as long you do. The debate about sustainable retirement incomes must address all the available options.
Joye suggests there are just two solutions to making your nest egg last longer:
1. put more money into super, or 2. accept a much lower standard of living in retirement.
It’s true, Australians have had very few cost effective options to ensure their super lasts for as long as they do, particularly if chances are you are going to live beyond 90. This has recently changed and there is a glaring omission in this ‘two options’ point-of-view, which is sharing our longevity risk so we don’t run out of money. As the recent Murray Inquiry showed, this delivers much more efficient outcomes.
None of us know when we are going to die. It’s impractical to expect everyone to save enough money to last until they are 100, this would be equivalent to self-insurance and incredibly inefficient.
A much better approach is to share some of this uncertainty through a longevity pooling product. That is, those who die earlier leave some money for those who live longer. The suggestion is not to invest all your retirement money in such a product.
All retirees need flexibility and access to some capital. However an investment of a quarter of one’s retirement benefit into a longevity product is feasible.
Longevity pooling products are available right now and we cannot, and should not, have the debate about retirement incomes and sustainable nest eggs without addressing them.
Longevity pooled products, such as Mercer’s LifetimePlus, are a mutual product and, as such, there is no capital required and no shareholders. After modest expenses, all the investments are shared with the survivors. LifetimePlus and is currently available within the Mercer Super Trust and Media Super.
Longevity risk must be considered as an important part of any financial plan prepared for the retirement years. As Joye pointed out, we are, on average, living longer. However, that does not mean we will all live to 100 or beyond.
A longevity pooling product will provide income for life whilst also providing a very clear outcome from the superannuation system – namely, secure retirement income for life. After all, that is the purpose of super.
Dr David Knox
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com.au Follow Mercer on Twitter @MercerAu