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Retirement Planning > Saving for Retirement

What Your Clients Don't Know About Longevity Could Hurt Their Retirement

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What You Need to Know

  • Most people don't know how long the average 60-year-old can expect to live.
  • People with a better understanding of longevity save more for retirement.
  • Advisory clients who understand longevity can set a more realistic retirement age and make better Social Security claiming decisions.

Do you know how long an average 60-year-old American will live?

Most people don’t. When given four possible responses, only 37% correctly identified the average longevity of men and women in a recent survey conducted by researchers from the George Washington University Global Financial Literacy Excellence Center and the TIAA Institute.

On average, 60-year-old men can expect to live an additional 22 years and women an additional 25 years. Most individuals either don’t know (28%) or underestimate (25%) their expected retirement-age longevity. Only 10% overestimate their longevity.

Why is it important for clients to understand how long they’re actually going to live? Many look to their parents or relatives, particularly those who died young (we tend to overweight early deaths because they’re more dramatic) to estimate retirement longevity.

If I don’t think I’ll live that long after I retire, why should I bother saving? Is it possible that the motivation to save is influenced by how long I think the average retiree will live?

This is exactly what the authors found.

Eighty percent of those who understood (or who overestimated) their retirement longevity saved for retirement on a regular basis, compared with 57% of those who didn’t know how long they were going to live and 68% who underestimated their expected longevity.

Fifty-four percent of those who had an accurate or optimistic expectation of longevity had estimated their retirement saving needs compared with 30% who didn’t know and 45% who underestimated how long they were going to live.

Similarly, 40% of those who could accurately guess how long they were going to live were very confident about having enough money to live comfortably throughout retirement compared with just 25% of those who didn’t know and 32% of those who underestimated longevity.

Having a clearer idea of longevity appears to be an important motivator of savings.

“If you look at the people who get it right versus those who underestimate, underestimating is strongly associated with failure to plan,” said Surya Kolluri, head of the TIAA Institute, which funded the research. “For a country that has shifted responsibility to workers, if only 37% get it right we have work to do to make sure people are ready for retirement.

“In our industry we’ve been very successful on communicating about accumulation, as a society we need to think more deeply about how long the money should last,” notes Kolluri.

Do Advisors Understand Longevity?

Many advisors use a “break-even” technique to evaluate the benefits of strategies such as delaying Social Security or income annuities. I’ve heard statement such as “the crossover age is 82, so I didn’t see any benefit from delaying Social security.”

I once spoke with an advisor who complained that the breakeven of an income annuity was age 84 for a female retiree, or 90 when discounted at today’s corporate bond rates. This makes perfect sense since a healthy 65-year-old woman will, on average, live to age 90. If the advisor is familiar with actuarial tables, they will recognize that the annuity is priced fairly. In other words, an average retiree can expect to receive back their original purchase price plus interest.

If an advisor has a more accurate understanding of how long their client will live, is it their job to educate the client? Is longevity education as important as, say, educating a client to avoid selling stocks during a market decline or the value of tax sheltering?

Although it might be easier to go along with what a client believes, a longevity-literate client can choose a more realistic retirement age, save more, and make a better decision about when to claim Social Security. In the long run, each of these decisions may benefit the asset-compensated advisor.

“There’s an incentive to increase knowledge because it provides a motivation to save more,” notes Kolluri. “Clients can also be prompted to think about the household unit versus the individual. The probability that one of the two spouses is going to outlive the other is pretty high, and there’s a high chance that one will live to 95.”

In fact, for higher-income clients the probability that one spouse in a couple will live beyond age 95 is over 40%.

Spreading Longevity Knowledge

One of the study’s authors, Annamaria Lusardi, professor of economics and accountancy at George Washington University, believes that the government should do more to provide basic longevity literacy education.

“One of the most important decisions people have to make is when to claim Social Security, she says. “Understanding longevity seems like a critical piece for informing people. It’s time to pay attention to that too.”

Jason Fichtner, a former chief economist for the Social Security Administration who is now vice president and chief economist at the Bipartisan Policy Center and senior fellow with the Alliance For Lifetime Income, believes that the SSA can do more to promote factual information that can be used to help workers make better claiming decisions by promoting consumer guides that feature information about longevity.

It’s perhaps more important to provide longevity literacy education to younger Americans than to near retirees. “If you have a long time to prepare for retirement, then it’s going to be much easier,” notes Lusardi. “Having good information about longevity — getting a sense that life is very long — will change the trajectory of young people.”

A simple way to increase longevity awareness is to add information in retirement statements of a defined contribution plan. This may not be as farfetched as it seems.

“ESG awareness started 10 years ago — now it’s part of statements,” notes Kolluri. “Is there a connection between knowledge and action? Eighty-one percent of respondents who answered correctly were currently saving for retirement through their employer plan versus 57% who got it wrong. Forty percent of those with higher longevity literacy were confident about retirement versus 25% of those with lower literacy.”

Investment companies and recordkeepers have a clear incentive to provide information about longevity.

A catalyst for advancing knowledge of longevity is the possibility that retirement plan defaults will begin offering guaranteed income to workers. Awareness that a retiree can expect to receive this income for decades can help participants recognize its value.

Women Have Higher Longevity Literacy

Longevity illiteracy is particularly costly for women if results in lower savings rates or early Social Security claiming. Fortunately, women appear to have better longevity literacy scores than men. Kolluri notes that “43% of women demonstrated an accurate understanding of longevity compared to 32% of men.”

Unfortunately, while women better understand how long they are likely to live in retirement, they also tend to have lower overall financial literacy scores. This likely occurs when married couples choose to split tasks, with married men often taking on the bulk of financial decisions.

Kolluri notes that women often are responsible for more health care decisions, including care of older relatives. “One of the reasons why we need to help women is that they are aware they are going to live longer,” she said, “but they’re often less capable of preparing financially for it.”