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A retiree’s guide to addressing financial risk

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Worryingly, the same research showed more than a quarter (26 per cent) of older Australians who indicated they would not be able to tolerate any loss are still fully invested in the share market.

This is often due to the need to generate sufficient income in retirement and, concurrently, a perceived lack of investment options for producing sufficient funds to support their lifestyle post-retirement. Annuities are, however, one option that can help older Australians achieve a confident retirement that takes the worry out of investing in unpredictable markets.

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Annuities are one option that can help older Australians achieve a confident retirement. Credit:Getty

“Annuities augment the defensive component of a retirement portfolio. They don’t replace the part of the portfolio intended to generate growth or liquidity. Their power is to provide peace of mind and address trial retirement challenges, including market, longevity and inflation risk,” says Jeremy Cooper, Chairman, Retirement Income, Challenger.

“With a lifetime annuity covering your essential spending needs, you can keep some of your savings invested in the market for higher expected long-term returns. Depending on your age, if the market falls, the value of your shares has time to recover because you won’t have to sell them to meet essential spending needs,” he explains.

An annuity can help older Australians feel confident they can continue to pay for their everyday expenses over the course of their life, even as the cost of living rises. This is because an annuity can link payments to inflation which will adjust annually to the cost of living.

“Lifetime annuities typically pay an income stream that increases with inflation so your spending power can be maintained,” Cooper explains.

A lifetime annuity will also provide income for as long as you live. This is important, as we tend to underestimate our own lifespan. This is partly because life expectancies have risen so dramatically in recent decades.

As a new Challenger report outlines, the results of one survey shows seniors thought an average 65-year-old Australian would live to 83.2 years at a time when the average life expectancy was actually 88 years – a difference of five years.

As the report notes, today people typically live well into their late 80s, 10 years longer than in the 1990s. In 2017, the most common age of death was 88, whereas 20 years earlier it was 78.

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People are living 10 years longer than in the 1990s, states a recent Challenger report. Credit:Getty

Additionally, average life expectancy figures are just that – an average. It’s now increasingly common for people to live into their 90s and beyond. If we do live well beyond the official average lifespan, we still need to provide for our day-to-day expenses. Annuities can help us do that.

As Challenger’s report shows, “Approximately two-thirds of today’s 65-year-olds will die somewhere between their early 80s and their mid-90s, across a span of around 16 years. A plan that only lasts up to the average life expectancy will disappoint one in two retirees.”

Says Cooper: “Owning a lifetime annuity can give you peace of mind that your living costs will be covered and your standard of living in retirement can be maintained.”

This peace of mind is something that older Australians are seeking according to National Seniors Australia CEO, John McCallum. “Retirees feel vulnerable to market volatility and the uncertainty that comes from a longer life expectancy and potential aged care costs. An annuity can assist because it provides a stable income to meet living expenses and can free up other savings to help you afford aged care costs in the later stage of your retirement”.

While we may be living longer and the cost of living continues to rise, there are plenty of steps retirees can take to reduce risk in retirement and annuities can play an important part in this.

If you’d like to find out more about how to look forward with confidence in retirement, download Challenger’s “A guide to a confident retirement”.

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