Page 4 - FWP Wealth Adviser Issue 109
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ISSUE 109
                                                                                                            APRIL 2025














            LIFE EXPECTANCY



            REIMAGINED



            NAVIGATING



            FINANCIAL


            RISKS AND


            RETIREMENT                                                                                                 Photo by cottonbro studio/www.pexels.com



            REALITIES








        BY WEALTH ADVISER                                       The Misconception of Life Expectancy in
                                                                Financial Planning
        Introduction: The Changing Perception of Life             Life expectancy is often misunderstood as a fixed end-
        Expectancy                                              point rather than a dynamic probability. For example, life
           Life expectancy is one of the most widely misunderstood   expectancy at birth is an average based on population-wide
        concepts in retirement planning. It is often quoted as a   data that includes infant mortality and other early-life
        single number—a statistical average—but this simplification   factors. However, as individuals grow older, their survival
        obscures the complexity of individual survival probabilities.   probabilities improve. This means that life expectancy at
        For retirees, this misunderstanding can lead to miscalcu-  age 65 is significantly higher than life expectancy at birth—a
        lations about how long their savings need to last, exposing   critical distinction for retirees.
        them to longevity risk—the risk of outliving their wealth. As
        Australians live longer than ever before, retirement planning   Don Ezra’s Perspective
        must evolve to address this challenge.                    Don Ezra’s article “Life Expectancy and Why I Don’t Like
           In addition to longevity risk, retirees face a host of   the Expression” offers valuable insights into this misconcep-
        financial uncertainties, including market volatility, inflation,   tion. He uses the example of a fictional species called Amici
        sequencing risk, and behavioural biases. These risks require   to illustrate how survival probabilities change over time.
        a nuanced approach that combines philosophical insights   For instance, if Amici have an average life expectancy of 80
        with practical strategies. This article explores how rethink-  years at birth but survive to age 65, their new life expec-
        ing life expectancy can help retirees navigate financial risks   tancy increases to 85 years. This demonstrates that retirees
        and design resilient retirement plans that align with their   should plan for longer lifespans than generalised statistics
        personal goals.                                         suggest.

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