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Life expectancy in Australia has reached record highs with a male born today expected to live to 80.7 years and a female to 84.9 years, according to the latest figures released by the Australian Bureau of Statistics (ABS). Male life expectancy has increased by 0.2 years over the 2015-2017 to 2016-2018 period, and by 1.5 years in the past decade. Female life expectancy has increased by 0.3 years during the same period, and by 1.2 years in the past decade.
This means that managing your retirement income is more important than ever, given your life expectancy is the longest it has ever been.
In terms of financial health, the key question always is: Will your retirement savings run out?
One thing is for sure, SMSF trustees and their advisers need to focus on the last 25% of their lives with more detail and planning. There are a few important considerations that are ingrained in this process.
Holistically, Australian retirees will need to understand their retirement spending strategies and ensure they have the right investment options and retirement products so income lasts for an extended retirement.
When you retire or are imminently about to retire, the SMSF Association believes it is important you review your SMSF’s current mandatory investment strategy to ensure its suitability for the retirement stage. The suitability of asset allocation for retirement is important. As an SMSF trustee you should take into consideration the requirement to pay retirement benefits while ensuring you have exposure to appropriate assets. For example, it may be necessary to sell certain assets and acquire others, keeping in mind that property transactions can be lengthy. One potential strategy involves reducing asset volatility to reduce the impact of market shocks on your retirement portfolio.
In addition, you must consider how you wish to cash your benefits as a long-term plan and assessing longevity risk (the risk your assets may run out). This includes assessing the use of lump sums, pensions or annuity investment products which guarantee a certain amount of income until death.
Ultimately, this assessment comes down to the living needs of you as an individual or couple and assessing your lifetime goals.
A great place to start is to seek financial advice. A good financial adviser can provide clarity around objectifying your goals, helping you to remain on track and providing a solution for savings, income and consumption.
Industry research and trends can also be useful. A number of academic papers suggest that retirement spending is likely to start reducing by age 80. This is a factor that comes as a surprise to many individuals who believe retirement spending is constant or may need to increase as an individual ages and their health may decline.
Another interesting retirement insight is the fact that some individuals restrict their spending more than needed. You may be inefficiently self-insuring against longevity risk, wish to leave bequests or typically be conservative. Seeking specific financial advice from an SMSF Specialist can help ensure you do not restrict your retirement enjoyment because you are worried about not having enough in the end.
As the retirement income system matures and the announced Retirement Income Review delves into how the system is providing for retirement, further insights will supplement the necessary planning Australian’s need to undertake in retirement.
Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.