Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 64

Your money or your life: what’s more certain?

Death and taxes are the proverbial certainties in life. Life, however, is full of uncertainties, like just how long a recently retired 65-year old will actually live and what the share market is going to do for the first ten years of their retirement.

Using a concept first explored by Moshe Milevsky, it is possible to compare the relative uncertainty around retiree lifespans and equity market returns using Australian data.

Market uncertainty

Investors are, of course, aware that equity markets are volatile. If a capital sum is invested for a period of time, the amount of capital available at the end of the period will be uncertain. The question is: how uncertain?

This question depends on the investment timeframe. As a rule of thumb, equity markets are volatile in the short term, but over the long run there is some reversion to the mean that partially reduces this volatility. For a retiree, the impact of returns in the first 5–10 years after retirement has a big impact on their capital base. So a 10-year period is an appropriate term to consider in a retirement context.

Data on equity markets from Credit Suisse, based on work by Dimson, Marsh and Staunton, provide the real returns on equities in Australia since 1900, split into 10-year periods. The returns for each decade can be seen in figure 1. These returns include all dividends and are before tax.

Figure 1. Real returns on Australian equities in 10-year periods.JC Chart1 300514

JC Chart1 300514

Source: Credit Suisse using data from Dimson, Marsh and Staunton

One way to consider volatility is to look at the variation (standard deviation) from the average outcome (mean). Using Australian equity market returns, the mean real growth can be measured by the 10-year effective compound annual growth rate (CAGR): 8.7%. The volatility in this example is the measure of plus and minus one standard deviation from the mean, which is 13% and 1.9%, respectively.

Another way to look at volatility is to use a co-efficient of variation (the ratio of the standard deviation to the mean). Using the same average 10-year Australian example, the co-efficient of variation is 47%.

Life expectancy vs actual lifespans

What about the variation of actual retiree lifespans from average life expectancies? How much certainty can a retiree have about the length of their own life from retirement onwards? The answer to this question might be a surprise for most retirees and their advisers.

In 2012, the most common age at death for someone who was 65 years-of-age or over was 87 (the mode). Despite this, taking the probability of survival from age 65, the mean ‘expected’ length of life for a 65-year-old was 18.1 years or to age 83. In reality though, very few people live exactly that long. Some live longer and some not as long. The range of actual lifespans around this mean point is represented by a standard deviation of 8.4 years either side of 83, figure 2.

Figure 2. Number of deaths (males and females) by age at death, Australia 2012.JC Chart2 300514

Source: ABS

For a 65-year-old, it is also possible to measure the volatility as a ratio between the variation of actual lifespans to the average life expectancy. Remarkably, the co-efficient of variation, the range of actual lifespans proportional to the mean, is also 47%. So it turns out that a 65-year-old has to cope with a lot of uncertainty around how long they are actually going to live.

Relative uncertainty

Both equity market returns over 10 years and actual lifespans (versus average life expectancies) for 65-year olds have the same relative level of uncertainty: 47%. While this result is generated through some selective data use, it does highlight that both the equity markets and actual lifespans at retirement are similarly uncertain.


Longevity risk is not just the risk of living longer and outliving retirement savings. Uncertainty around a retiree’s actual lifespan is another, more complex, aspect of longevity risk. Financial models and retirement plans generally revolve around average or expected life expectancies, done so for the sake of convenience. This is a serious industry shortcoming.

Two known retirement uncertainties – a retiree’s actual lifespan and the money earned on equity investments (pre-tax investment returns) – have a surprisingly similar dimension. Both forms of uncertainty need to be managed in retirement at the same time. The first step in doing this is to move away from planning for averages. Retirees know that they won’t achieve average share market returns and will build a portfolio to adjust for this.

What far fewer retirees will have realised is that they will almost certainly not live to their average life expectancy either.


Jeremy Cooper is Chairman, Retirement Income at Challenger Limited.

Peter Vann
May 31, 2014

The BBQ conversation in the link below illustrates the misleading results from using averages for investment returns

We believe that the inclusion of investment volatility and mortality uncertainty in estimating retirement outcomes should be handled differently. Investment volatility affects most retirees according to their specific investment strategy. However, whilst we all are subject to mortality, it is much more idiosyncratic (as mentioned by Ramani in comment #2).

But assessing retirement income within mortality considerations is much easier than investment volatility. It involves providing the relevant information to a retiree (or their planner) which illustrates the trade-off between the level of a sustainable retirement income* and how long it will last. The chart in the above link shows this trade-off for one member using their investment strategy.

Then a retiree can then make informed decisions regarding the likelihood of retirement income levels** against financial longevity incorporating their own “mortality” situation and investment volatility.

* including the impact of investment volatility
** optionally incorporating a different relative income level through each retirement phase

May 31, 2014

Navigating life based on averages is not dissimilar to crossing a river: on an average you are unlikely to drown.

Taking Steve Schubert's comments into greater granularity, individual retirees should have a better basis to calibrate their own mortality by considering personal health, heredity, past occupation and current life style factors. More difficult to do this with exogenous investments especially in our DC model (as argued in my joint paper 'Actuarial Challenges in DC Schemes', Diversification across assets, industries and locations and life-cycle transformation have been suggested as plausible ways of dampening undue variances around the average.

We should also reduce the system's load by discouraging super being used as an inheritance tool as it now blatantly is.

A less travelled route worth exploring is to minimise retirement expectations by considering the controllable components on the contra side: after all, in the twilight years some of the more pleasurable and expensive pursuits are medically or physically contra-indicated. The flesh is less willing to pursue expensive escapades. If we could add to this a modicum of family support (replicating what we do to our kids in their vulnerable ages and Confucius-led Singapore has illustrated), we might about get it right. Finance alone will never cut it.

If all this fails, resort to Omar Khayyam:

Ah, Love! could thou and I with Fate conspire
To grasp this sorry Scheme of Things entire,
Would not we shatter it to bits — and then
Re-mould it nearer to the Heart’s Desire!

Steve Schubert
May 30, 2014

Good article Jeremy. A former colleague of mine, Don Ezra, also reached this conclusion about the relative uncertainties of equity markets and lifespan. Another longevity issue impacting retirement planning is what "population" the average is drawn from. The most obvious and common population refinement is to separate male and female life expectancies. However, taking into account socio-economic status, smoking habits and other characteristics if data is available can help futher refine the relevant average (though not necessarily the variation around the mean).


Leave a Comment:



Summer Series, Guest Editor, Jeremy Cooper

Living the lifestyle you want in retirement

Putting off that retirement speech


Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.


Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.


Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.