You may need to save for a longer life

THE federal government's latest Intergenerational Report has dished up some remarkable findings about our life expectancy.

It's estimated that in around 40 years, nearly 2 million Australians will be aged 85 or more, including 40,000 people who will live beyond their 100th birthday.

This exceptional rise in longevity has profound implications for the way we invest our retirement savings.

When we think about investing the issue of 'market' risk often comes to mind. It's the likelihood that investment markets will take a dip in the red leaving us with less capital and therefore reduced money to live on in our senior years.

But there is growing awareness of 'longevity' risk - the possibility that we could outlive our savings. And it's not just something future generations of retirees need to plan for.

The Association of Superannuation Funds of Australia (ASFA) recently released a report entitled 'The future of retirement income'. It shows the average life expectancy of a 65-year old female today is about a further 22 years, to 87. A 65-year old man can expect to live for a further 19 years to about age 84.

Remember, these are averages. The same research shows around 40 percent of woman - and 26 percent of men - currently aged 65 will live to age 90.

With potential lifespans like these, tucking all your retirement assets into term deposits and other cash-based investments that yield low returns is no longer a realistic approach to making your money last through retirement.

After all, your retirement could span 30, maybe even 40 years. Portfolio diversification and having greater exposure to growth assets like shares, are the keys that can help retirees make their superannuation last longer.

To see how this works in practice, ASFA looked at a number of scenarios. It found that retirees with a 'defensive' portfolio, where the bulk of their money (75%) is invested in cash and fixed income assets, could reasonably expect their super savings to last until about age 90 (assuming eligibility for a part Age Pension).

By contrast, retirees who invest in a more diversified portfolio with 43% in cash/fixed income and the remainder spread across local and international shares, property and other investments, could stretch out their retirement savings for an extra eight years.

These projections rely on a few important assumptions notably a lump sum of $510,000 on retirement, and a comfortable though not extravagant lifestyle. Nonetheless, the exercise highlights the merits of investing in growth assets in our senior years.

Along with the potential for higher returns, growth assets bring additional risks. This leaves retirees facing some complex decisions when deciding their ideal portfolio mix. Making the right choice is important and accessing quality information plays a valuable role here.

ASFA's consumer website - Super Guru ( features a range of useful booklets and fact sheets, or take a look at my book Making Money for ideas on investing in retirement.

Tailored advice can be an excellent investment in retirement, and many super funds offer a financial planning service or speak with a professional financial adviser to determine the blend of investments best suited for your retirement needs.  

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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