One Minute Guide
July 2012
How long you live determines how
much money you need
No-one can predict how long they will live but we all want
our savings to last the distance in retirement. Fortunately
there are simple tools which can help us estimate realistic
life expectancy, which means we have a better chance of
effectively planning for our retirement.
One in ten males aged 65 in 2011 can be expected to
live to at least 97 years
You might outlive the median life
expectancy
It is possible to factor in mortality improvements for
a more realistic measure. Chart 1 includes Australian
Intergenerational Report mortality assumptions1 and
demonstrates that the average life expectancy is longer
than the Life Tables estimate, i.e. 50% of men aged 65
in 2012 are expected to live to almost 88, compared
to 84 as set out in the Life Tables. This is shown by the
green line in Chart 1.
Challenger One Minute Guide
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
109
107
105
103
99
101
97
95
93
91
89
87
85
83
81
79
77
75
73
71
0%
69
According to the 2008-2010 life tables, a 65-year old
man has a life expectancy of around 19 years, and a
female of the same age, 22 years. However, there are
problems with using these tables to determine your life
expectancy; the data is a snapshot in time and they do
not take into account the fact that we are living longer
due to improvements in mortality.
Probability of a 65-year old male surviving to different ages
67
The Australian Bureau of Statistics (ABS) life tables are
a commonly used measure of life expectancy, although
they are based on historical data only and don’t take into
account improvements in mortality resulting from things
like healthier diets and medical advances.
Chart 1: Distribution of life expectancy using
Australian Intergenerational Report mortality
assumptions
65
People are living longer
Source: Challenger Life Company Limited estimates
It is important to remember that while a more realistic
measure, the median still represents the middle result for
a group of people the same age and gender. Half will
live longer than expected and half will not. If using the
average life expectancy, it could mean that only half of
these people’s retirement plans will succeed.
In fact, Chart 1 shows that as at 2012, one in five 65year old men can be expected to live to 94 (the grey line)
and one in ten to at least 97 (the blue line). This means
that if a 65-year old male retiree in 2012 wants to make
sure that they have a 90 per cent chance of their super
savings lasting as long as they do, they must plan for
their savings to last until they are 97 (32 years rather
than 18 years).
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One Minute Guide
Preparing for an uncertain lifespan
Living longer than expected is a gift but also a source of
risk, which necessitates the saving of more capital to give
greater confidence that your money will last the distance.
Using average investment returns2, a 65-year old male
in 2012 would need $685,000 for his savings to last to
age 97. Conversely, if this 65-year old male ‘planned’ to
live only to life expectancy (87 for a 65-year old man,
according to Chart 1), he would only need $440,000.
The length of time you want to plan for will determine
your required balance of retirement savings. Having
enough money to give 100% certainty that it will last
for life may mean that you leave a substantial estate
behind. However, by planning just for your estimated
life expectancy, you take on the risk that you will live
longer, which might mean that you spend several years
of retirement surviving on the more modest Age Pension.
This is ‘longevity risk’.
More information
Investors: Speak to your financial adviser or contact Challenger Investor Services on 13 35 66.
Financial advisers: For more retirement income research, visit AdviserOnline, contact your
Challenger Business Development Manager or call Adviser Services on 1800 621 009.
E xpected mortality assumptions from the 2010 Australian Intergenerational Report (IGR), made available by the Retirement and Intergenerational
Modelling and Analysis unit, The Treasury.
2
Assumptions: Investment returns of 7 per cent every year with expenditure of $40,407 per annum increasing at a rate of 2.5 per cent per annum to
account for inflation.
1
Disclaimer:
The information contained in this guide is provided by Challenger Life Company Limited, ABN 44 072 486 938, AFSL 234670 (Challenger) and is current
as at 20 July 2012. This information is not intended as personal financial product advice, legal advice, taxation advice or social security advice. It does
not take into account the investment objectives, financial situation or needs of any person. An investor should consider the appropriateness of this
information having regard to their own objectives, financial position and needs before making any investment decision. You should seek independent
financial advice and read the relevant product disclosure statement (PDS) prior to making an investment decision. All such PDSs are available by
contacting your financial adviser or Challenger by calling our Investor Services team on 13 35 66 or visiting our website www.challenger.com.au.
All examples are hypothetical and for illustration purposes only. They are based on our understanding of current law, which may change at a future date.
All information has been obtained from sources believed to be reliable and accurate at the time of publication. Any forward-looking statements in this
guide are by nature subject to uncertainty and contingencies, so that actual results may vary materially from any forward-looking statements provided.
All reasonable care has been taken to ensure correctness of facts stated and the examples given. We make no warranty in relation to, nor accept any
responsibility or any liability for any errors in misstatements nor for any loss or damage arising out of, or in relation to the material in this publication,
however caused. Past performance information is not a reliable indicator of future performance.
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