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Retirees underestimate life expectancy, risk underfunding retirement

According to the Society of Actuaries report, “Underestimation of life expectancy, combined with having too short of a planning horizon can result in inadequate funds for retirement needs”

August 31, 2012 9:12 IST | India Infoline News Service
With life expectancy rates on the rise, more than half of retirees and pre-retirees underestimate the age to which a person of his or her age and gender can expect to live, which can have significant implications on retirement planning, according to a new report from the Society of Actuaries (SOA).

Illinois-based SOA is one of the largest professional organisations dedicated to serving 22,000 actuarial members and the public in the US, Canada and worldwide. The SOA report “2011 Risks and Process of Retirement Survey Report,” said four in 10 underestimate their life expectancy by five or more years.

“Underestimation of life expectancy, combined with having too short of a planning horizon can result in inadequate funds for retirement needs,” said actuary and retirement expert Cindy Levering. “There is a general misunderstanding of what ‘average life expectancy’ means, and when people are told they will live to an age such as 80 or 85, they don’t realise that this means there is a 50% chance that they could live past that age.”

Life spans continue to increase, according to the SOA report. In the past half-century, life expectancy for newborn American males improved by an average of almost two years each decade, from 66.6 years in 1960 to 75.7 years by 2010. For females, the average increase was about 1.5 years per decade, from 73.1 years in 1960 to 80.8 years by 2010.

The SOA figures show that males have a 40% chance and females have more than a 50% chance of living to age 85 (if they reach age 65 and are in average health).
“Underestimation of life expectancy increases the chances that retirees and pre-retirees will exhaust all resources other than Social Security, while it may also discourage using life annuities,” Levering said. “While purchasing life annuities is not an absolute guarantee, it is one strategy to reduce the risk of outliving financial resources.”

Although the majority of retirees and pre-retirees believe they will live into their 80s, a comparison of respondents’ estimates of their own life expectancy and the life expectancy of the overall population shows: Over 54% of retirees do not believe they will live as long as the average person their age and sex. Thirty one percent of retirees cite a life expectancy that is longer than the population average. On the other hand, 46% of pre-retirees think they will live below the population average, while 41% of pre-retirees believe they will live longer than an average person of their age and sex.

Despite the misconception surrounding personal life expectancy, most retirees (64%) and pre-retirees (72%) say they would be very or somewhat likely to reduce their expenditures significantly if they were to live five years longer than expected.
Retirees say they typically look five years (median) into the future, while pre-retirees typically look 10 years (median) ahead when making important financial decisions.

"The 2011 Risks and Process of Retirement Survey" was conducted on the SOA's behalf by Mathew Greenwald and Associates, Inc, and the Employee Benefit Research Institute (EBRI) through telephone interviews of 1,600 adults ages 45 to 80 (800 retirees; 800 pre-retirees–twice the sample number of prior surveys) in July 2011, before the most recent stock market volatility, US debt downgrade and numerous federal interest rate announcements. Households were selected for participation from a nationwide targeted list sample.

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