Retirees and baby boomers with investments in self-managed Super funds (SMSF) who have the potential to outlive their retirement savings may find themselves in a financial quagmire if their SMSF advisers do not immediately address the situation.
Financial experts believe that SMSF advisers play an important role in ensuring that their clients get the most out of their SMSF, and must consider and devise long-term investment strategies and provide longevity risk advice to counter the longevity risks stemming from increased and/or prolonged life expectancy.
What is longevity risk?
Longevity risk is basically any potential risks associated with the increasing life expectancy of policyholders and pensioners, which often leads to higher-than-expected payout ratios for pension funds and insurance companies. Insurance policies and pension funds that offer lifetime benefits to its holders are usually exposed to the greatest levels of longevity risks, as payout levels are higher than what the fund initially accounts for.
As investors from the baby boom era enter their retirement phase and cease to contribute to their funds, this plus the combination of benefit payments and drawdowns from funds will be significantly overwhelming than what their contributions can cover. This leads to severe solvency issues for pensioners and insurance policy providers.
Longevity risks also present adverse impacts on policyholders as well. If not addressed, many policyholders and pensioners who “outlive their funds” and exhaust their resources will definitely experience financial difficulties in their retirement years.
The Role Financial Advisers Play
Many financial experts encourage advisers to sit with baby boomers and retirees who have SMSF investments and advise them to consider long term investments to address longevity risks. However, it is still difficult to quantify and measure longevity risks as average life expectancy continues to rise due to a lot of factors, including better diet, advances in medicine and medical technology, and improved healthcare among others.
That being said, many financial experts tell advisers to devise investment mechanisms based on the group’s lifestyle as a start. If you feel that your SMSF structure is not set up to cover you well after you stop contributing, or if you want to discuss long term investment options, better call your SMSF adviser and see what can be done.