Many not planning well for life expectancy, study finds

A new study by Jackson Financial Inc. and Boston College suggests that most seniors are not as concerned about longevity risk – i.e., outliving retirement resources – as they should be, as most are not accurately predicting their lifespan.

Longevity risk refers to the chance that life expectancies and actual survival rates exceed expectations or pricing assumptions, resulting in greater-than-anticipated cash flow needs on the part of insurance companies or pension funds.

“People do not accurately estimate their life expectancy when comparing their expected longevity to standard mortality tables,” Glen Franklin, assistant vice president of Research and RIA & Lead Generation Strategy at Jackson, said.

“Most overestimate their life expectancy, and increase the risk of not effectively planning for late life events such as long-term care.

“For the third that seem to be underestimating their life expectancy, they are potentially amplifying longevity risk with a planning horizon that is too short.”

Outliving savings is one of the biggest risks for Americans who are approaching retirement or already retired, according to the study. However, just 22% of respondents identified it as their major concern.

In contrast, financial advisors tend to predict longer lifespans than their clients do. One-third of the professionals surveyed expressed concern about clients outliving assets.

As such, the study recommended that individuals work with financial professionals to plan for a “successful retirement.”

Longevity planning insights

For this study, Jackson Financial and Boston College surveyed more than 1,000 investors aged 55-84; as well as more than 400 financial professionals and financial psychologists. The study aimed to identify and assess retirement-related risks.

“We designed the study to be able to compare and contrast the views of retirement investors with those of financial professionals to understand where there were gaps in understanding between the two groups and to identify strategies for more effective planning in addressing this risk,” Franklin said.

The survey noted the urgency of the matter given that around 10,000 Americans reach retirement age every day. Yet, it noted that people are living longer, “use of employer-based pension plans has declined,” Social Security benefits may be diminished in the future, and guaranteed lifetime income products such as annuities are “underused.”

However, longevity risk was not a major concern for most respondents. The death of a spouse or partner was the biggest concern for 47% and the need for long-term care was the biggest concern for 35%.

At the same time, most overpredicted their life expectancy. Younger participants, aged 55-59, were most likely to underpredict their life expectancy; and just 12% of all respondents had predictions that were more closely aligned to standard actuarial tables.

Respondents also tended to overestimate inflation and underestimate investment returns compared to historical averages.

Professional help recommended

The study concluded that “one of the key ways longevity risk may potentially be avoided [is] by working closely with a financial professional.”

Financial advisors were found to take a more careful approach to retirement-related risks, and also tended to believe more clients were concerned about longevity risk than were letting on.

“Advisors are both more conservative in their planning assumptions and also more likely to use long-term averages for key inputs like investment return and inflation rates,” Franklin said.

While most respondents predicted a lifespan of around 87, financial advisors surveyed routinely recommend “planning for income to last until 90-95 years of age.”

“A lot of [my clients] chuckle and say, ‘I don’t think I am going to last that long.’ A lot of clients say the same thing, and yet they are retired, and their parents are still alive,” an anonymous advisor said.

“So, I say I’d rather err on the side of you having more money and having money available at these later ages.”

A financial advisor can also help clients with annuities, which Franklin said could help mitigate longevity risk and which more than half of respondents expressed interest in.

“Currently, fewer than 20% of households in the U.S. own an annuity that offers guaranteed lifetime income. Thus, we consider this solution to be underused,” Franklin said.

“Interestingly, in looking at annuity and pension ownership, those who have both are more likely to want to leave an inheritance than those who have neither…

“That implies that the income streams are not about spending; they’re about protecting savings, so they don’t have to draw down their assets in retirement.”

Advisor considerations

Franklin also suggested that more financial professionals consider gender in retirement planning, as the study found women may spend more in retirement than expected.

“Gender matters, yet most advisors indicate they do not vary the plan to account for it,” Franklin said.

“Few advisors take gender-based factors into account, while we found that looking at the gender of who makes financial decisions in the household accounts for significant differences in financial behavior and outlook.”

Jackson Financial Inc. is a financial services company that focuses on retirement planning for professionals and clients.

The Center for Retirement Research at Boston College studies insights on retirement income issues across the United States.

Rayne Morgan is a Content Marketing Manager with PolicyAdvisor.com and a freelance journalist and copywriter.

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Rayne Morgan is a journalist, copywriter, and editor with over 10 years' combined experience in digital content and print media. You can reach her at [email protected].