We Have Another Five Years? Underestimating Longevity and Working in Retirement

With life expectancy rates on the rise, more than half of retirees and pre-retirees underestimate the age to which a person of his or her age and gender can expect to live, which can have significant implications on retirement planning, according to a new report from the Society of Actuaries (SOA). Of the respondents with financial concerns, many indicated they planned to work in retirement.

Among the findings in the SOA report about working in retirement 35 percent of pre-retirees surveyed do not expect to retire, up from 29 percent in 2009.

This SOA highlights report illustrates findings on longevity from the “2011 Risks and Process of Retirement Survey Report,” such as approximately four in 10 underestimate their life expectancy by five or more years.

“Underestimation of life expectancy, combined with having too short of a planning horizon can result in inadequate funds for retirement needs,” said actuary and retirement expert Cindy Levering, ASA, MAAA, EA. “There is a general misunderstanding of what ‘average life expectancy’ means, and when people are told they will live to an age such as 80 or 85, they don’t realize that this means there is a 50 percent chance that they could live past that age.”

Life spans continue to increase, according to the SOA report. In the past half-century, life expectancy for newborn American males improved by an average of almost two years each decade, from 66.6 years in 1960 to 75.7 years by 2010. For females, the average increase was about 1.5 years per decade, from 73.1 years in 1960 to 80.8 years by 2010.

The SOA figures show that males have a 40 percent chance and females have more than a 50 percent chance of living to age 85 (if they reach age 65 and are in average health).

“Underestimation of life expectancy increases the chances that retirees and pre-retirees will exhaust all resources other than Social Security, while it may also discourage using life annuities,” Levering said. “While purchasing life annuities is not an absolute guarantee, it is one strategy to reduce the risk of outliving financial resources.”

Although the majority of retirees and pre-retirees believe they will live into their 80s, a comparison of respondents’ estimates of their own life expectancy and the life expectancy of the overall population shows:

54 percent of retirees do not believe they will live as long as the average person their age and sex.
31 percent of retirees cite a life expectancy that is longer than the population average.
46 percent of pre-retirees think they will live below the population average, while
41 percent of pre-retirees believe they will live longer than an average person of their age and sex.

Despite the misconception surrounding personal life expectancy, most retirees (64 percent) and pre-retirees (72 percent) say they would be very or somewhat likely to reduce their expenditures significantly if they were to live five years longer than expected.

Retirees say they typically look five years (median) into the future, while pre-retirees typically look 10 years (median) ahead when making important financial decisions

Although the majority of pre-retirees as well as retirees say the desire to stay active and engaged is a reason to work in retirement (with 89 percent of pre-retirees planning to work and 77 percent of retirees already working in retirement), financial concerns also play a critical role in the decision. In fact, more than four in 10 pre-retirees, who do not expect to retire, say it is because they are financially unable to do so (45 percent).

Photo by Ed Schipul, Wikimedia Commons: Point Judith, Rhode Island

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We Have Another Five Years? Underestimating Longevity and Working in Retirement

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