The cost of living longer

This article, from the US smart money magazine, is a fascinating look at the latest thinking on how long we are likely to live. You really should read it in full.

It looks at the latest thinking on longevity, and what that means for retirement planning. Some US life insurers are providing insurance older and older, even for people who have had brushes with cancer and other nasty diseases, on the basis that modern medicine really is getting much better. Some of the underwriters interviewed for the article suggest that you really should plan on living to age 95.

Many Australian financial plans tend to look at the average life expectancy and save on that basis. On average, a 65 year old Australian man should expect to live to 83, and a 65 year old woman should expect to live to 86. So if you are likely to live to 86 (based on your current age) you should make sure you have enough capital and income to last that long. If you die sooner, at least you can pass on the left over money to your heirs.

But what if you live longer? Most Australians would assume they will live off the aged pension in that case. And it is generally enough so that you won’t starve (although if you don’t own your own house you’ll find it tougher). But the aged pension is not a huge amount of money. The maximum rate for a single pensioner is $748.80 per fortnight, and $564.50 per person for one half of a couple. That’s $19,536 for a year for the single pensioner.

Longevity is a real risk, but not one that most people are willing to insure against. It feels like a bet that you lose twice. If you die too soon, you’ve missed out of years of life, and an insurance company got to keep your money. I blogged about this years ago. I don’t believe the longevity insurance (generally annuities) will ever be more than a tiny niche product in Australia. But it is still a risk most people should think about.