Underestimating Years in Retirement

Summary
The failure to adequately estimate the number of years in retirement is experienced both by individuals as they plan their own retirement as well as by governments and institutions as they model pension and entitlement program expenses.

The resulting financial implications are quite large. If the average life span increases 3 years by 2050, as expected, the ‘cost of aging’ would increase by 50%. There is little data on how people think about longevity or why they choose a particular estimate for their own lifespan, yet how long people expect to live sets an important context for longevity risk in retirement planning. Longevity data used for planning purposes, both individual and institutional also regularly underestimate life expectancy. There are gender, socio-economic and health differences in longevity estimates but in general people do not appear to understand the true extent of the risk. Commonly accessed planning tools don’t provide much help to the individual either; either by being too heterogeneous or simplistic or by failing to provide needed context for customization.

Underestimating the Number of Years in Retirement

The accumulated evidence suggests a prevailing tendency for people to underestimate their longevity. (O’Connell, 2010)
2 in 3 pre-retiree men underestimate the life expectancy of the average 65-year-old man. Of that group, 42 percent underestimate average life expectancy by 5 years or more. Roughly half of pre-retiree females underestimate the life expectancy of the average 65-year-old woman. (SOA, 2011)
Men appear to underestimate longevity by less than do women. (O’Connell, 2010) The number of people who don’t know what estimate to use forms a sizable group (+21%). (O’Connell, 2010)
Policy makers cannot assume that people share a rationale to prepare for a retirement of a realistic length or that people believe that policy rhetoric about working longer as a response to longer lifespans applies to them. (O’Connell, 2010)
There is almost no data on how people think about lifespan or little explanation for how underestimation of longevity occurs. (O’Connell, 2010)
Older workers nearing retirement are not well informed about company and national retirement plans and that incorrect knowledge affects retirement planning. (Clark et al., 2010)

Using Incorrect Assumptions for Life-Span

The main source of longevity risk is (the) discrepancy between expected and actual life spans, which have been large and one-sided; forecasters, regardless of the techniques they use, have consistently underestimated how long people will live. (IMF, 2012) (Table 4.1.1)

Failing to Adjust Perceptions to Current Reality

Many workers are adjusting their expectations about retirement, perhaps in response to their reduced level of confidence about their retirement finances. (EBRI, 2012a)
The actual age of retirement has increased even more slowly. There is a considerable gap between retirement expectations and experience. The median “expected” retirement age is 65, the median “actual” age is 61. (EBRI, 2012a)
There is a large discrepancy between pre-retirement confidence in having paid employment for as long as needed vs. the actual experience of retirees. (EBRI, 2012a)
The big question is whether there will be employment opportunities available for those who want to continue working. (EBRI, 2012a; Munnell & Sass, 2008)
Projections based on the 2010 census indicate that Labor Force Participation rates for those over 65 will increase dramatically between 1980 and 2018. (U.S. Census Bureau Statistical Abstract)