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?