Longevity Risk

Longevity risk is the chance that your retirement savings run out before you do. Retiring at 60 means funding a horizon that can stretch 25 to 30 years. Life expectancy at 65 is roughly 85 for a man and 88 for a woman. A 65-year-old couple has roughly a one-in-two chance of one member reaching their early nineties. The risk compounds with sequence risk - a bad first decade of returns does more damage the longer the withdrawals run.

In Australia, the risk is softened by a floor most countries lack: the Age Pension pays for life from 67, means-tested, so savings running out does not mean income running out. The trade is that the pension is modest - the basic rate sits near $29,500 a year for a single homeowner - so longevity risk is really the risk of falling from your planned income to the pension floor. Managing it means sizing withdrawals for a 30-year horizon rather than a hopeful one.

The mechanics are an annuity problem run in reverse. A balance earns a return while withdrawals come out, and the question is whether the return outruns the withdrawals for the full horizon. An $800,000 balance drawing 5 percent - $40,000 a year - survives indefinitely in nominal terms at a 5 percent return, because the withdrawals never exceed the growth. The same balance drawing 8 percent - $64,000 - depletes in roughly 20 years even at a 5 percent return, and in roughly 15 once inflation takes its share of the real return.

The arithmetic sharpens with sequence risk. A retiree who draws $40,000 indexed through a decade where returns average zero spends the decade drawing down the principal, and the recovery that follows works on a smaller balance. The same average return with the bad decade at the end barely dents the plan. The order is not in your control; the withdrawal rate is.

The Age Pension changes the calculation. From 67, the pension pays for life, means-tested against income and assets - so a balance that depletes at 82 drops the retiree onto roughly $29,500 a year, not zero. The pension is longevity insurance the government provides: it does not prevent the fall, it caps it. Minimum drawdown rules on account-based pensions - 4 percent at that age - set the floor of withdrawals, not a safe ceiling.

For an Australian reader, longevity risk is the reason the drawdown rate matters more than the return chasing that fills most retirement conversations. A 30-year horizon needs a withdrawal rate that survives a bad decade, and the safe withdrawal rate entry covers the arithmetic; the account-based pension entry covers the minimum drawdowns. Lifetime annuities and the Age Pension floor are the structural answers; the withdrawal rate is the one you control. The retirement calculator runs the horizon arithmetic before the decision, not after.

A colleague named Brent (yes, that Brent) retired at 60 drawing 8 percent because his father died at 72. His mother is 88 and still driving. The plan was built on the wrong parent, and the drawdown left no room for the correction. The highest-leverage thing most Australians can do is size withdrawals for a 30-year horizon and treat the Age Pension as the floor, not the plan.