It is a fact of life that nobody knows exactly how long they will live. Of more concern is that most people don't know how long they are expected to live on average either. Given that Australian seniors are responsible for financing their own retirement, this is a significant financial literacy issue.
In a 2014 survey of seniors, respondents thought that an average 65-year-old Australian would live to 83.2 years, when the correct figure at the time was 88 years-almost five years higher (National Seniors Australia, 2014). In the survey, the average estimation of own life expectancy for the 50-54 age group was seven years below the correct average, while for the 70-74 age group it was two years below.
Speed of change
Today's retirees are now typically living into their late 80s; 10 years longer than they did in the 1990s. In 2017, the most common age of death in Australia was 88, whereas only 20 years earlier in 1997, it was age 78. The speed of this change partly explains why it is not well understood in the community.
What is life expectancy?
Life expectancy is an estimate published by the government of how long people are likely to live on average. These can be estimates from birth or from other ages, typically age 65. How long you are expected to live on average is vital information for Australians who are over age 50 and are starting to plan seriously for their retirement. Unfortunately, this information is currently not getting through to those who most need it.
The potential causes are:
- complicated and differing information maintained by separate parts of government
- widespread ignorance across the financial services industry
- over reliance on averages and out-of-date inputs in retirement calculators.
The result is consumer confusion and potentially poor outcomes, because people cannot plan properly for the financial implications of a longer than expected retirement.
Confusion around life expectancies
Take the latest life expectancy figures from the Australian Bureau of Statistics (ABS). The ABS estimates, based on data from 2015-17, that the life expectancy of an Australian male is 80.5 years and 84.6 years for a female (ABS Cat No. 3302.0.55.001). These are authoritative and accurate, but they are apt to be misinterpreted.
This is because they are estimates of life expectancies from birth, so they include the deaths of people who die young from accidents or illness. As a result, these figures are misleading to use for retiree life expectancy because they are too low. Having reached age 65, you have a higher life expectancy because you are already a survivor. It is alarming how often supposed experts use these figures to talk about retirement planning. The most recent example was in a weekend newspaper in August 2019, where it was cited: "If you are 65 today, you should expect to live to 80.4 for men and 84.5 for women" ('How to turn your retirement savings into a regular pay cheque', The Sydney Morning Herald, 31 August 2019).
The figures were both out-of-date and used in the wrong context. Getting to the correct figures, however, is currently far too difficult for nearly all of the relevant stakeholders: members of the public; financial advisers and others who are involved in providing financial services.
The ABS does produce life expectancies for 65-year-olds, but it merely looks at the probability of survival based on data from the past. There is an improving mortality trend that means that each generation is living longer than the previous one. Another part of government, the Australian Government Actuary (AGA) inside The Treasury, estimates this trend and provides improvement factors that can be used to adjust 'unimproved' life expectancies.
These two separate sources of data are not easy to locate or reconcile and hence are not as widely understood as they should be. This means that many estimates of life expectancy fall short of the mark because only the 'unimproved' ABS expectancies are used. Based on the improvements over the past 25 years tabulated by the AGA, half of today's 65-year-olds will live to at least age 88 for males and at least age 90 for females. These numbers have been increasing for many years and are likely to continue to increase for some time, even though the rate of that increase might fluctuate from year to year.