When it comes to retirement planning, there is one crucial question that many investors struggle to answer correctly: “What is your life expectancy?” Underestimating or overestimating this factor can have significant implications for your financial situation during retirement.
A recent survey conducted by the TIAA Institute and George Washington University’s Global Financial Literacy Excellence Center (GFLEC) shed light on the poor understanding of life expectancy among U.S. adults. Shockingly, two-thirds of the participants were unable to answer even basic questions about life expectancy for 60-year-old men in the United States.
Understanding your life expectancy is essential when planning for retirement. Failing to do so can mean risking outliving your savings or leaving a substantial amount of money unused.
Even more disheartening is the follow-up research published by the TIAA Institute/GFLEC, which revealed that even when given the correct answer, people’s grasp of “longevity literacy” did not improve.
To illustrate this, let’s test your knowledge. Consider the following question posed to the survey participants: “If life expectancy among 65-year-old individuals is 20 years, which of the following statements is true?”
- About one-half of 65-year-olds will live past age 85.
- The vast majority of 65-year-olds will not live past age 85.
- About one-half of 65-year-olds will die between age 84 and 86.
The correct answer is the first option. Life expectancy, as defined by the researchers, refers to the number of additional years beyond which one-half of the group members will live, while the other one-half will not.
Understanding your life expectancy is crucial for effective retirement planning. By acknowledging this factor, you can make informed decisions that align with your financial goals throughout your retirement years.
Understanding Life Expectancy in Retirement Planning
Only 35% of survey respondents were able to correctly answer a question about life expectancy in retirement planning. It’s understandable why the majority got it wrong, as most people assume they should plan for a retirement that lasts until their projected life expectancy. However, this can lead to financial shortfalls for half of us who are likely to live longer than our predicted life expectancy.
To illustrate this point, let’s take a look at the accompanying chart. The chart shows the percentage of 65-year-old U.S. males who are still alive at different ages. According to the latest Social Security actuarial tables, 50% of 65-year-old males will still be alive at age 83. This is why Social Security reports the life expectancy of a 65-year-old male as 83. For women, the percentage of those still alive doesn’t drop below 50% until age 86.
Now, let’s consider different probabilities of outliving our money. If you want a 10% probability, you should plan your retirement finances to last until age 93 for males and 96 for females. If you want an even lower probability of 5%, you should plan for retirement through age 96 for males and 98 for females.
This new understanding of life expectancy may require many of you to reassess your retirement financial plans. However, it’s better to know this now rather than later. By being aware of these facts, you can be better prepared for your future.
Stay informed, stay prepared.