Longevity Risk: Will Your Money Last as Long as You Do?

01 Why the average is the wrong number

Life expectancy figures are averages, and half the people in any average are above it. That is the whole problem in one sentence, and it is why planning to the average is planning to run out roughly half the time.

A man reaching 65 in Australia can expect to live into his mid-80s on average. A meaningful share reach their 90s. And for a couple the relevant number is not either individual's expectancy but the chance that at least one of them is still alive — which is materially higher than for either alone, and is the age the money actually has to cover.

Planning to the average therefore fails in a specific and asymmetric way. If you overestimate your lifespan you die with money left over, which is a bequest or a margin of comfort. If you underestimate it you run out at 88 with no capacity to earn and no ability to undo the decision. Those two errors are not symmetric and should not be treated as equally acceptable.

The practical response is to plan to a high age — commonly 95, sometimes 100 for a couple — rather than to an expectancy. The cost is spending somewhat less in the early years. The benefit is that the plan does not depend on being right about how long you live, which is not knowable.

Source: Australian Bureau of Statistics — Life expectancy

02 The Age Pension is the floor

The reason longevity risk in Australia is real but rarely catastrophic is the Age Pension. It is paid for life and indexed, so it does not run out however long you live.

That changes the shape of the risk fundamentally. If your savings deplete at 88, your income does not fall to zero — it falls to the Age Pension, which for a homeowning couple is a modest but genuine income floor with a concession card attached. The question is therefore not "will I have nothing?" but "will I have to live on the pension alone, and could I?".

Answering that honestly is more useful than any projection. Look at the current full pension rate for your situation, compare it to what you actually spend, and identify the gap. If the pension covers your essentials and the shortfall is discretionary, running out of savings late in life is uncomfortable rather than ruinous, and you can afford to spend more in your sixties than a strict plan would allow.

If the pension would not cover your essentials — because you rent, or have high health costs, or carry debt into retirement — the risk is much sharper and the case for a guaranteed income layer is much stronger. The pension being a floor is only reassuring if the floor is above your needs.

The standard advice is to plan to life expectancy, and taken literally that builds a plan with roughly even odds of failing — because half of any population outlives an average. What people assume is a conservative assumption is in fact the median outcome, and the two errors it trades between are not symmetric: money left over is a bequest, and money run out at 90 is not recoverable.

Source: Services Australia — Age Pension

03 Worked example: how long savings last

The core lever is your withdrawal rate. Draw too hard and savings deplete early; draw modestly and they can last indefinitely, because earnings replace what you take out.

The calculator shows the age at which savings run out for a given spending level and return, and how a smaller draw or a higher return pushes that age out. Past a certain point the line stops crossing at all — the portfolio is self-sustaining, and the longevity question resolves itself.

What it deliberately does not model is a bad sequence of returns, which is a different risk with a different defence. Nor does it model the legislated minimum drawdown rates, which force a rising percentage out of an account-based pension as you age whether you want the income or not. A rate that survives average returns can still fail against the same average delivered in the wrong order.

On the defaults above, the worked example returns —. Savings deplete at 123. After that you rely on the Age Pension — which is exactly the longevity risk to plan for.

04 Flexibility beats precision

You cannot forecast your lifespan or your returns. You can build in flexibility, and flexibility turns out to be worth more than getting any single number right.

Retirees who can trim discretionary spending in a poor market — postponing a holiday, deferring a car replacement, spending less on a bad year — dramatically reduce the chance of depleting their savings, because they are not forced to sell assets at the bottom to fund fixed commitments. The same portfolio and the same average return produce very different outcomes depending on whether the spending can flex.

This is why the structure of your spending matters as much as its level. A retirement where 80% of spending is fixed — rent, loan repayments, insurance — has almost no flex available and needs a much more conservative withdrawal rate. One where a meaningful share is genuinely discretionary can sustain a higher rate, because bad years can be absorbed rather than funded.

The practical version is a rule agreed in advance rather than improvised under stress: if the portfolio falls more than a set amount, discretionary spending pauses for the year. Deciding that at 65, while calm, is far easier than deciding it at 74 in the middle of a market fall, and it is the single cheapest protection against longevity risk available.

Source: ASIC Moneysmart — Retirement income

05 Lifetime income products

For people who want to hedge longevity directly rather than manage around it, lifetime income streams — traditional annuities and the newer lifetime retirement income products — pay a guaranteed income for as long as you live, transferring the risk to the provider.

The trade is explicit. You give up flexibility, because the capital is committed and generally cannot be recalled in full, and you usually give up some or all of the bequest that capital would have left. In exchange you receive an income that cannot run out, whatever happens to markets or to how long you live.

Two things make them more attractive in Australia than the arithmetic alone suggests. Certain lifetime income products receive concessional Age Pension means-test treatment, with only a portion of the purchase price counted as an asset — which can lift the pension alongside the private income. And the guarantee removes precisely the risk that is hardest to self-insure, since no amount of careful drawdown planning protects against living to 100.

The usual sensible shape is not all-or-nothing. Using a slice of savings — enough that the guaranteed income plus the Age Pension covers essential spending — leaves the remainder invested and flexible for everything else. That combination addresses the risk that actually matters, which is not having less than you hoped, but being unable to cover the basics at 95.

Annuities are widely believed to be poor value because "you lose your capital", and that reading misses what is being bought. The pooling is the product: those who die early fund those who live long, which is precisely why an annuity can pay more than a portfolio can safely distribute. Judging it as an investment rather than as insurance is what makes it look expensive.

Source: ASIC Moneysmart — Annuities

06 Putting it together

Managing longevity risk is not one decision, and no single product or number solves it. It is a combination, and the components reinforce each other.

Plan to a high age rather than to an expectancy, because the two errors are not symmetric. Treat the Age Pension as the income floor it genuinely is, and check whether that floor actually covers your essentials — the answer changes the whole plan. Choose a withdrawal rate that survives a bad decade rather than an average one. Keep a meaningful share of spending genuinely discretionary, and agree in advance what gets paused in a poor year. And if it suits your circumstances and preferences, commit a slice of savings to guaranteed lifetime income so that the essentials are covered whatever happens.

What ties them together is that each addresses a different failure mode. A high planning age handles the length of the retirement; the withdrawal rate handles the average market; the buffer and the flexibility handle a bad sequence; the lifetime income handles the tail nobody can self-insure. Doing three of the five leaves a specific gap, and it is worth knowing which one.

Review it periodically rather than solving it once. Your spending, your health, your partner's situation and the market will all differ from what you assumed at 65, and a plan revisited every few years with real numbers beats a more sophisticated plan set once and left alone.

Source: ASIC Moneysmart — Retirement income

07 What each lever actually buys you

Five levers are available and they are not interchangeable — each addresses a different part of the risk at a different cost.

The third row is the one worth noticing: it is the only lever that costs nothing and it is the one most often left unused, because it requires a decision made in advance rather than a product bought.

Source: ASIC Moneysmart — Retirement income