The Ungrateful Dead

Grateful Dead, the US rock band, is this year celebrating 50 years of, well, live performances, I guess. I bet the founding members didn’t think when they formed the band in 1965 and gave it such a great name (that pun was actually intended) that they wouldn’t be around half a century later. I guess it just goes to show, you just can’t tell how long you will last in this world.

Which makes me think of the pursed-lipped tut-tutting that is happening in Australia right now about The Ungrateful Dead. These are people who have the temerity to die before using up all their superannuation savings, hence bequeath the residual to the next generation. Here’s a piece of journalism on the topic in today’s Financial Review:

“This year an estimated $8.5 billion will be bequeathed by the estates of Australians who die before using up their retirement savings, according to superannuation advisory firm Rice Warner.”

The social services Minister has stated that he thinks that people who have been granted tax concessions to build up their super should actually spend it, rather than saving it and drawing the age pension. There is some logic missing in there, given our means-testing system that increases the amount of age pension when you have less assets separately, but we’ll let it go.

The Ungrateful Dead. So many media commentators today are lining up and tut-tutting their mean, thrifty behaviour – unfairly using tax concessions to pass on wealth to the undeserving next generation. It’s not more than a few years ago that the Ungrateful Dead were being criticized for blowing their super savings on a round-the-world holiday then coming home to live on the pension. Double-dipping, it was called. And then they didn’t die soon enough!

If you want to avoid this disapproval in the eyes of the journalists writing this stuff, then you should do the sensible thing and plan to use up all your savings on the day you die. This only requires a simple calculation of how much you should spend each year once you determine what your future investment return will be and how long you will live for. Simple, really.

Longevity – is it a new incurable disease?

If you care to look at the financial press, personal investment magazines or the information brochures published by superannuation funds, you could be excused for concluding that a new incurable disease has become entrenched in the community – longevity. The fear of living too long and running out of money in retirement is affecting more and more people, particularly in the light of weakening Government finances which are needed to pay for the age pension.

Enormous volumes of papers and investment brochures, armies of financial advisors, whizz-bang calculators and projectors available on-line are all at work on the population. The message is almost always that Australians need to save more for retirement. People are constantly reminded of how long they are expected to live and how much money they will need to meet living expenses. However, funding a comfortable lifestyle in retirement is increasingly looking beyond the capability of the average person.

The expectation of life of a 65 year old male in Australia is now just over 19 years and fractionally over 22 years for a 65 year old female, according to the Australian Life Tables 2010-12 recently released by the Australian Government Actuary. At the start of the 20th century, when the Government funded old-age pension was introduced in Australia, the expectation of life at age 65 was 11.3 years for males and 14.2 years for females. If life expectancies continue to improve, then at some point, it becomes impossible for the average household to fund retirement. The value of wages earned on a life-time of labour over a 45 year time-frame, say from age 20 to age 65, is simply not enough. If the retirement age is held constant at 65, the problem has no solution – it does not matter how much people are cajoled about saving more, the preference for food, clothing, shelter, medicine in the present will always be stronger than the preference for a greater superannuation balance that could be needed many years into the future.  Continue reading

An age-old solution to an old-age problem

Sooner or later, people will wake up to the fact that the actuaries of more than 100 years ago had come up with a robust and efficient system of providing for old age that did not require every individual to accept longevity and market risk on their own with no options to hedge. Having individuals plan for retirement on the basis that they ‘might’ live longer than average is a flawed approach. Risk pooling is the way to manage this effectively and efficiently. And actuaries can price that risk for trading in the market.

The asymmetry of life expectancy

According to Australian statistics, the average male aged 65 can expect to live until age 83. For females, it is age 86. (These statistics are extracted from the Australian Life Tables 2005-07). That might seem like a useful base upon which to plan for retirement. How much savings are needed before someone is able to retire depends on how much they need to meet living expenses and how long they are going to live. Predicting living expenses is a lot easier than predicting your remaining lifespan, but you have to start somewhere.

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