Most people will live longer than they think they will, according to actuarial expert Alison O’Connell. And this matters when it comes to preparing for retirement.

“I’ve read many, many studies all over the world on this and they come to the same conclusion. Most people underestimate how long they think they’re going to live (compared to what actuarial tables indicate) by quite a significant amount. Five to seven years on average,” she says.

Alison has decades of experience as an actuary (someone who predicts and assesses the financial risks and impacts of future events) specialising in mortality and longevity and helped found the Retirement Income Interest Group in New Zealand.

Faulty figures
She says part of the reason people misjudge their likely lifespan is that the figures we routinely see quoted in public commentary are often wrong.

“They’re not relevant, they’re not forward-looking estimates. They date from a period back in time, so they don’t allow for the fact that people’s longevity is improving throughout their lives.”

In a similar vein, people tend to think of their own life expectancy based on their parents and grandparents.

“That means they’re automatically underestimating because longevity increases over the generations,” Alison says.

For example, the life expectancy of a 65-year-old is said to be 88, with the implication being that most won’t live past that age. In fact, the median – or the age at which half die younger and half die older – is 90, while the most common age this cohort will live to is 91.

“So, you’re creeping older and we’d argue that if you’re worried about how long you’re going to live in terms of longevity risk, you’ve got to bear in mind these older numbers. And then ask yourself, what’s the chance of growing older than that? At least one in five, or 20%, will live to at least 95 or older,” she says.

Think about it
It’s crucial that people consider this as part of their retirement planning. Alison suggests assuming you’re going to live to between age 90 to 95.

“That’s not to say you have to arrange for your money to last until that age. It might be that you say, well, if I run out of money I’m OK to live on just NZ Super for five years or so. Or if there’s more left in my estate to pass on, I’m OK with that too. As long as you think about it and work out what’s right for you,” she says.

We’re fortunate here that NZ Super is relatively simple and easy to understand. Unlike in other countries like the UK where you can’t just draw down as much as you want from your savings without thinking about tax implications, or Australia where they means test.

Normalising decumulation
However, Alison thinks we need more education around decumulation, making sure the information people get is standardised and easy to understand. The need will become more pressing as KiwiSaver balances grow.

She says the concept of decumulation can be challenging for people to get their heads around, especially because retiring is already challenging on a number of levels.

“My father is 94 and he still finds it an exceptionally difficult concept. I keep saying, you know the things that you’ve saved for are here, spend some money. But he finds it very difficult to actually decumulate.

“I think people feel more secure if they hang on to what they’ve got. And part of that is the fear of not knowing how long you’re going to live. We might have thought about it conceptually before, but it’s a different issue when you’re getting closer to it,” she says.

Good things take time
While the overarching message is quite simple - save as much as you can, while you can, and think about how long it has to last - Alison is quick to point out that longevity is a positive thing, too.

“I think it’s quite important that we remember this is a good message. All the statistics say you’re going to live for a really long time, to 95 or older. Make the most of your life and don’t think you have to do everything at once. It’s not all about finances, it’s about how you live your life.”

Talk to the experts
As Alison notes, the prospect of their money running out before they do is a scary prospect for many retirees.

Lifetime Retirement Income’s product brings fundamental retirement income theory to life, using it as the basis for a practical, real-world application. The New Zealand Society of Actuaries’ paper: “How to make a draw down a success” sets out several core principles that underpin a retirement income for life. We’ve turned these principles into a simple, accessible retirement income solution.

If you’re keen to find out how the Lifetime Retirement Income Fund could meet your clients’ decumulation needs, get in touch. You can contact us here.

Written by: Vanessa Glennie
Vanessa is Head of Communications at Lifetime Retirement Income. She’s an experienced investment writer, having spent more than a decade writing about financial markets in the global fund management industry.