Understanding how long we might live can influence important decisions, such as how much to save or whether to buy an annuity. Image: Hyejin Kang/Shutterstock.com
By: FEDweek Staff
Those the run-up to retirement and in their early retirement years tend to under-estimate their life expectancy, with an impact on their savings for their retirement and their management of money once they are in it, says a study.
“Adults ages 55-70 tend to be pessimistic about how long they will live, as their guesses about the chances of living to older ages are lower than the objective data,” said the Center for Retirement Research at Boston College.
“This pessimism may negatively affect decisions about savings and annuitization, since individuals will 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 said.
It said that in a survey, the main factor respondents used when estimating their own life expectancy, by 59 percent, was the age at which parents, grandparents or other relatives died. Information from medical professionals or financial advisers was cited as the main factor by 26 percent and media coverage of life expectancy by 8 percent, while the rest cited other factors.
“People may be aware of average life expectancies but not about their likelihood of living to older ages. Furthermore, many individuals base their life expectancy on either their parents’ age of death or on media reports, but neither of these factors consider likely future improvements in lifespans,” it said.
As part of the survey, respondents were given statistical information from Social Security about probability of living to living to ages 90 or 100. Those who said they based their estimates on advice of financial professionals—who were more optimistic about living to older ages to begin with—became still more optimistic.
However, that information “had no impact on those who based their life expectancy assessments on their parents’ age of death or other factors . . . such people tend not to base their assessments on expert opinion.”
“Understanding how long we might live can influence important decisions, such as how much to save or whether to buy an annuity. Yet, many people underestimate their chances of living to older ages, which may lead them to save too little and avoid annuities, potentially reducing their financial security in retirement,” it said.
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