“ For the majority of New Zealanders drawing retirement savings down over time to fund retirement living is mandatory. The old 4% rule is based on an investment history that is very unlikely to be repeated calling into question the validity of this approach. Perhaps more important is the actual cash required to maintain a level of income above NZ Super that will last a lifetime.  Jeremy Cooper from Challenger in Australia noted at the recent Retirement income symposium that the average Superannution account value on retirement in Australia is in excess of A$400k. A draw down rate of 3 or 4 % plus the pension might work although no answer to longevity or market risk. In New Zealand the number today for most of New Zealand will be less than a third of this at very best – a drawdown rate of 3 or 4 % will simply not be enough to make a meaningful contribution to every day retirement expenses. While talking my own game…. guaranteed retirement income products with higher rates for different ages with in built longevity insurance can make a meaningful contribution to retirement income planning.”

Often the question that weighs most on older Australians is, ‘what happens if I outlive my money?’ The risk of living too long can be a serious one, and with volatility returning to markets in the wake of the UK’s Brexit referendum, this fear is likely to again be at the forefront of investors’ minds. But when it comes to selecting the right retirement and life insurance products, investors must keep a cool head.

According to Milliman, one of the world’s largest providers of actuarial products and services, Australians investing for retirement and beyond are turning to risk pooling products, which offer increasingly innovative ways of dealing with longevity risk.

Solutions such as pooled mortality vehicles and mortality credits, which effectively transfer benefits from shorter-lived to longer-lived investors, can be an effective way of helping to ensure that investors have sufficient income to support themselves until death.

However, such products vary in complexity, and the benefits received by individual participants are often based on a number of assumptions. Investors considering pooling their mortality risk should look carefully at how individual products work to ensure that they are suitable for them.

“Mortality credits are a potentially valuable source of return for longer-lived retirees,” said Craig McCulloch, Head of Analytics at Milliman. “However, the value of mortality credits is heavily affected by product design, and can vary depending on whether an insurer provides an explicit guarantee or whether these credits depend on actual pooled mortality experience. They can also be materially impacted by the extent of product features, such as access to full liquidity on lapse or surrender.”

While pooled mortality products come in varying degrees of sophistication and complexity, the two main factors affecting value for individual investors are product design and life expectancy.

With Australians living longer, investors must have a clear understanding of the product to ensure it is suitable for them. For those unfortunate enough to die early, a simple annuity product offers a very poor investment return as all capital is lost on death, and this loss is used to cross-subsidise those who live longer. Likewise, a contract design with 100% death benefits provides for a more significant benefit payable to those who die or surrender their contract early, but it also significantly reduces the mortality credits receivable by those who live longer.

Given the debate surrounding the proposed Life Insurance Framework (LIF) legislation, there has been renewed focus on consumers’ understanding of life insurance and related products, as well as the fear of underinsurance. While underinsurance is a valid fear, investors also need to ensure that the insurance they choose is appropriate for them and their life circumstances.

According to Lonsec Research, while mortality credits can be an effective means of mitigating longevity risk and avoiding underinsurance, it is essential that the investor feels comfortable with the product structure and understands the trade-offs involved.

“Mortality credits are an innovative way of dealing with longevity risk, or the risk of running out of income before you die,” said Eleanor Menniti, Senior Investment Consultant at Lonsec Research.

“But you need to understand how the mortality credits are generated and what assumptions are being made. More generous liquidity and death benefits will generally mean reduced mortality credits for those who are longer-lived. There will always be uncertainties, and as investors we cannot plan for everything, but we can ensure that the insurance product we choose is suitable for us and caters to our requirements.”