Longevity risk — the risk of outliving your savings — is one of the most significant financial risks in retirement. It is also one of the hardest to plan for, because no one knows how long they will live. A 65-year-old retiring today might need to fund 20, 25, or even 30+ years of retirement.
This guide covers what longevity risk means in practice and what general strategies can help manage it.
How Long Do Australians Live?
According to ABS data, life expectancy at age 65 for Australians is approximately:
- Men: ~20 more years (living to around 85)
- Women: ~22 more years (living to around 87)
These are averages — which means half of 65-year-olds will live longer than these figures. A 65-year-old couple has a high probability that at least one partner lives into their 90s.
Implication: When planning retirement income, assuming you’ll only live to 80 is a significant underestimate for many people. Planning to age 90–95 is more conservative and more appropriate for most.
Why Longevity Risk Is Amplified for Super
Unlike a workplace salary (which continues regardless of how long you work), or a defined benefit pension (which pays for life), an account-based pension from super is a finite pool of money. If you draw too much, too quickly, or live longer than expected, the balance reaches zero.
Three factors combine to amplify longevity risk:
- Longer life expectancy — Australians are living longer than previous generations
- Sustained low interest rates — low returns on cash and bonds reduce the income generated from savings
- Higher lifestyle expectations — retirees today expect an active, longer retirement that costs more to fund
The Sequence-of-Returns Risk
Even if long-term returns are adequate, the timing of poor returns matters enormously in retirement. A major market downturn in the first few years of retirement — when you are drawing from the account — can permanently impair the balance in a way that doesn’t recover.
Why timing matters:
- If your $600,000 falls to $450,000 in Year 1 of retirement due to a market downturn, and you continue drawing $30,000/year, you are now drawing a much higher percentage of a smaller base
- That earlier depletion means less capital available to benefit from any subsequent market recovery
Strategies to manage sequence-of-returns risk:
- Keep 1–2 years of spending in cash or low-risk assets within the pension account, so you don’t need to sell growth assets during downturns
- Consider a “bucket strategy” — short-term cash, medium-term bonds/balanced, long-term growth, progressively drawing from lower-risk buckets during periods of market stress
- Avoid drawing heavily from growth assets in down years if alternatives exist
Drawdown Rate Management
One of the most direct levers you have is how much you draw from your super each year.
The ATO minimum drawdown rates (4% at age under 65, rising to 14% at 95+) represent the minimum you must draw. Drawing only the minimum preserves capital for longer.
Sustainable drawdown rate: Financial planning research (including the widely-cited “4% rule” from US research) suggests drawing approximately 4% of the initial balance per year (inflation-adjusted) may be sustainable over a 30-year retirement. However, this is a starting point — not a guarantee — and depends on investment returns.
Tips:
- In good return years, avoid increasing spending permanently — consider one-off additional amounts rather than a permanent lifestyle upgrade
- In poor return years, consider drawing from cash buffers rather than selling growth assets
- Review your drawdown rate periodically against your balance and remaining life expectancy
The Age Pension as a Longevity Buffer
The Age Pension is one of the most important tools for managing longevity risk — and it’s often underestimated.
As your super depletes with age, your assets fall below Centrelink thresholds and your Age Pension entitlement increases. For many retirees, the Age Pension acts as an automatic safety net that increases as private savings decline.
A retiree who entered retirement with $500,000 in super and no Age Pension eligibility may, after 15–20 years of drawdown, have a reduced super balance that qualifies for a significant part Age Pension. The full Age Pension for a single person (~$29,000/year) provides a meaningful income floor.
Planning consideration: If you are within 10 years of Age Pension age (67), factor in when you will likely become eligible and at what level — this affects how aggressively you need to preserve super in the early years.
Investment Mix in Retirement
Many retirees shift entirely to conservative investments (cash, bonds) out of fear of market losses. While this reduces short-term volatility, it also reduces long-term returns — potentially accelerating the depletion of capital.
For a 67-year-old retiree who may live to 90+, a 20+ year investment horizon remains. Over that horizon, a meaningful allocation to growth assets (shares, property) can significantly improve outcomes.
A common approach is:
- Keep 1–2 years of spending in cash (to meet minimum drawdowns and living expenses without forced selling)
- Maintain a diversified balance in growth and defensive assets for the remainder
- Gradually shift toward more conservative as age increases and the time horizon shortens
Annuities as a Longevity Floor
A lifetime annuity (purchased from an insurance company or super fund) provides a guaranteed income for life — regardless of how long you live. It is the only financial product that directly addresses longevity risk.
The trade-off:
- You give up access to capital (once purchased, you generally can’t get the lump sum back)
- You receive a fixed or indexed income stream for life
- If you die early, the annuity may provide little benefit (depending on the terms)
Most Australian financial planning approaches suggest annuities are best used to cover essential spending (a “floor” of income), with the remaining super invested in a flexible account-based pension for discretionary spending. Using a small portion of super for an annuity — rather than the entire balance — is the common framing.
Annuities are not appropriate for everyone. They are worth considering for those with very long expected lifespans or those who are anxious about outliving their savings.
Frequently Asked Questions
If the Age Pension kicks in as my super runs out, am I really at risk of longevity? For most Australians, the Age Pension prevents true destitution. However, the Age Pension provides a modest income (~$29,000/year single). If you want a comfortable retirement, relying entirely on the Age Pension in later years requires significantly reducing lifestyle expectations. The goal is to manage drawdown so that the super lasts alongside a growing Age Pension contribution — not to rapidly deplete super and fall back entirely to the pension.
Should I invest more conservatively as I age? Generally, yes — reducing risk exposure as you age (and as your time horizon shortens) is prudent. However, the shift should be gradual, not abrupt. Many retirees still have a 15–20 year investment horizon at 70. A total shift to cash at 67 is likely to be too conservative and can accelerate capital depletion.
Is it better to draw less from super and live modestly, or draw more and enjoy retirement while I’m healthy? This is a deeply personal decision. There is a concept in retirement planning called “go-go, slow-go, no-go” years — the early years of retirement (often 65–75) tend to be the most active and spending-heavy; the middle years slow down; the later years often involve less discretionary spending but more health-related costs. Some retirees deliberately draw more in the early “go-go” years while they are healthy, accepting that later years may rely more on the Age Pension. This is a values-driven choice, not a purely financial one.
See also: Retirement Income. For advice tailored to your retirement income situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.