While investors are generally concerned about longevity risk — people outliving their retirement savings — new data from the Boston College Center for Retirement Research and the Jackson Life Insurance Company shows that investors consistently underestimate life expectancy.
This creates a misalignment between expectations for retirement savings and the actual amount of money that will be needed.
“The research suggests that not only are many retirement savers surveyed less concerned about longevity risk than perhaps they should be, but also many are relying on methods to calculate their life expectancy that aren’t reliable when compared to more statistics-based models,” the report said. “Only about 12% of investors surveyed predict their life expectancy in a way that aligns with actuarial tables provided by the Social Security Administration.”
Data from the vast majority of respondents — from a pool including interviews with and surveys polling financial professionals, as well as surveys of more than 1,000 retirement savers — suggests that life expectancy is typically overpredicted or underpredicted. Nearly one-third of respondents were underpredicting life expectancy, exposing them to more acute longevity risk.
Underprediction tends to come in at “a little more than five years on average,” the report explained, and is most focused on investors who are nearly — but not quite at — retirement age.
“Underpredicting life expectancy was most common between the ages of 55 and 59, posing a unique challenge for early pre-retirement planning,” the study explained.
Interestingly, the study also found that investors routinely get their own life expectancy wrong by measuring their own against their parents, who in most cases have different generational circumstances that could impact their own longevity.
“Over 40% of investors surveyed rely on the age of a parent at death to project their life expectancy,” the study said. “While a parent’s age at death can be one useful data point, it’s not considered a reliable predictor on its own of how long their offspring will live. It’s true [that] the children of parents who live long lives are more likely to remain healthy and outlive their peers, but there are often several other factors involved in how long they live.”
An example includes the fact that many long-lived individuals are nonsmokers, do not have obesity, cope well with stress and — in most cases — are women. Genetics is a factor, but those determinants also include lifestyle and the environment.
“In fact, it’s estimated just 25% [of longevity] is determined by genetics,” the report said.