How long do you think you’ll live?
Projecting how long people think they'll live is a crucial exercise in retirement planning.
An accurate estimate of life expectancy helps determine, for example, just how much money you should be saving each year, the amount of risk you can afford to shoulder, and whether or not you should buy an annuity later in life.
People will tell you that they make unbiased estimates of how long they’ll likely live based on concrete information, such as age, gender, family history, health, geography, and lifestyle.
But that’s not what really happens. Most just guess — poorly, it seems. In a recent report, the Society of Actuaries found that people typically underestimate their allotted time by a healthy margin.
When asked to guess the age to which an average person of his or her age and sex could expect to live, about 40 per cent underestimated the age by five or more years and another 20 per cent fell short by two to four years.
For the record, here's the likelihood of 65-year-olds living to certain ages, according to SOA figures.
A 65-year-old man has a 41 per cent chance of living to age 85 and a 20 per cent chance of living to age 90. A 65-year-old woman has a 53 per cent chance of living to age 85 and a 32 per cent chance of living to age 90.
If they’re married, the chance that at least one of them will live longer is increased. In fact, there's a 72 per cent chance that one of them will live to age 85 and a 45 per cent chance that one will live to age 90.
Even the way in which the question itself is worded throws them off, it seems.
Researchers from three U.S. universities conducted experiments with large groups of adults in which half were asked to determine the probability of their living to a certain age; the other half were asked to estimate the chances of their dying by a certain age.
All of the participants provided estimates on whether they would live or die by the time they were 75, 85 and 95 years old.
People considering how long they would live were more optimistic, estimating that they had a 55 per cent chance of being alive at age 85.
Those thinking about when they would die were more pessimistic, however, envisioning a 68 per cent chance of dying at 85 — or just a 32 per cent chance of being alive.
The “live to” framing of the question appears to prompt positive thoughts about the future, whereas the “die by” framing produces thoughts of death, thus leading to shorter estimates of lifespan.
Overall, there also was a 10-year gap in the median expected age of death. A positive framing of the question, in other words, produced a 10-year increase in how long people expected to live.
Is this merely a parlour trick? At one level certainly, but the age factor is important in any planning exercise. It's the essential element in deciding where to deploy your money and how to avoid outliving it — and it’s more complicated if there are two of you.
After you each develop your personal "live to" profile, compare notes. If the odds say one of you is likely to go much sooner than the other, factor this in to the plan.
To have enough to cover the possibility of living longer than expected, however, you’d need to save more and, probably, save for longer. Your investment strategy might change as well, since being too conservative earlier on will work against you.
You should also consider purchasing some form of life annuity — a product that provides insurance against outliving your savings.
If you have a pension, choose a payout option that will provide sufficient income for the spouse with the longer life expectancy. You generally have a choice of whether the surviving spouse will receive 50, 60 or 75 per cent of your benefit.
People are often tempted to select the lifetime benefit because it pays the highest monthly pension — but remember that cheque will be sent only while your partner is alive. And if the pension includes retiree health benefits, these will stop too.
When to tap into government pensions like CPP and OAS is another issue. That’s because for each year you delay receiving these benefits past 65, they grows by about six per cent per year until age 70 — a significant boost over time.
While there’s no way of knowing for sure, the good news is that you’re likely to live a lot longer than you think.
Got a question about investing, saving or retirement? Send Gordon an email and we might answer your question in a future column.
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