Understanding how long a given client might live can significantly affect their decisions about saving for and spending in retirement, but as explored in a new report published by the Center for Retirement Research at Boston College, many people poorly understand longevity.
Americans underestimate their odds of living to older ages, the CRR report warns, particularly in the context of a healthy couple entering retirement at age 65. Across wealth segments, adults ages 55 to 70 tend to be overly pessimistic about how long they will live, as their guesses about the chances of living to older ages are meaningfully lower than the objective data.
Conversely, adults who are older than 70 tend to overestimate their life expectancy, with more people in this age range expecting to live to 90, 95 or older compared with the objective probabilities.
Taken together, these subjective longevity expectations are likely to negatively affect decisions about savings and annuitization, according to the report, since individuals have to decide whether to buy an annuity and how to draw down their 401(k) balances at ages when they are most likely to underestimate their life expectancy.
It is beholden on advisors, the report offers, to better educate clients about their prospects of living to age 90 or beyond. Yet, as the research also details, providing objective longevity information is effective in changing the perspective of only about a quarter of test subjects — specifically those who rely primarily on experts rather than anecdotal experience to inform their thinking.
Educational intervention was largely ineffective for the many study participants who rely on their parents’ experience to assess their personal longevity, the authors warn, so more research is needed on how to help them.
The Study
Like prior studies, the CRR survey found that the majority of respondents based their longevity assessment on their parents or other relatives’ age of death, while about 10% based it on media coverage. At the same time, about one-quarter of respondents said they relied primarily on the opinions of health or financial professionals.
From this starting point, the researchers divided survey participants into a control group and two intervention groups.
The control group was offered “irrelevant material” unrelated to life expectancy, survival probabilities or mortality improvements over time. After those participants read this content, they were asked to estimate how long they think they might live and their probability of living to various ages through 100. As expected, the control group's views of longevity probabilities did not substantially change.
The first treatment group was given information about their probability of living to ages 90 and 100 from Social Security death records, data which in general shows that they should expect to live longer than their parents or late relatives from prior generations. As with the control group, they were then asked to estimate how long they think they might live and their probability of living to various ages between 75 and 100.
As the authors note, interventions that tell people how much longer they might live relative to their parents (or grandparents for younger individuals) have not been studied before. Thus, in addition to data about the likelihood of living to older ages, the second treatment group was also given information on rising longevity across cohorts and how much longer people live compared to their parents or grandparents. Then, as with the other groups, they were asked to estimate their probability of living to various ages between 75 and 100.
The Results
Both intervention strategies worked reasonably well, but only for one group of respondents — those who based their life expectancy predictions on advice from medical professionals or financial advisors.
“Respondents who trusted experts became more optimistic about living to older ages after receiving either of the informational interventions,” the authors point out. “This group represents a little over a quarter of the survey respondents who received the treatments.”
In contrast, the interventions had no clear impact on those who based their life expectancy assessments on their parents’ age of death or other factors.
The authors then compared the effects of the interventions with that of financial advisors, finding that the interventions had a similar effect on people’s predictions for living until older ages as having access to a professional advisor.
“Although the interventions only work for about a quarter of the population — those who trust professionals — the results are still encouraging since not everyone has access to a financial advisor,” the researchers conclude. “In short, these informational interventions can be a cost-effective way to improve longevity awareness. ... Better longevity awareness can positively influence key decisions, such as how much to save or whether to buy an annuity."
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