Most people don’t know how long the average 60-year-old will live in America. When given four 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.
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 overweight premature deaths because they’re more dramatic) to estimate retirement longevity.
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.
Eighty percent of those who understood (or who overestimated) their retirement longevity saved for retirement regularly, 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.
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.”
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. Although it might be easier to go along with what a client believes, a longevity-literate client can choose a more realistic retirement age, save more, and make a better decision about when to claim Social Security. In the long run, each of these decisions may benefit the asset-compensated advisor.
It’s perhaps more important to provide longevity literacy education to younger Americans than to near retirees. A simple way to increase longevity awareness is to add information in retirement statements of a defined contribution plan. This may not be as farfetched as it seems. Investment companies and record keepers have a clear incentive to provide information about longevity.
Longevity illiteracy is costly for women if results in lower savings rates or early Social Security claiming. Fortunately, women appear to have better longevity literacy scores than men. Unfortunately, while women better understand their longevity, they are likely to live in retirement, and they also have lower overall financial literacy scores. This likely occurs when married couples choose to split tasks, with married men often taking on the bulk of financial decisions.
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