There's a good chance you're not planning for retirement correctly. Here's why.
Retirement planning is a daunting exercise for most Americans, who are exhorted to save as much as possible for their golden years. But there's another essential piece to retirement that most people struggle to understand and that threatens their long-term financial security, according to recent research.
That little-understood cornerstone of retirement planning is accurately estimating your longevity, or understanding how long you're likely to live once you hit retirement age, according to recent findings from Annamaria Lusardi, an expert on financial literacy and a professor at Stanford University as well the TIAA Institute.
The research found that only about 1 in 10 U.S. adults have a solid grasp of how long 65-year olds live on average, as well as the likelihood of living to 90 years old versus dying by age 70. Although such calculations may sound morbid, they are vital to planning for a secure old age because workers will need to make their dollars last for retirements that are longer than in previous generations, thanks to longer lifespans.
Many Americans tend to believe they'll die earlier than is statistically likely, which means they might not be saving enough for retirement, Lusardi and Surya Kolluri, the head of the TIAA Institute, told CBS MoneyWatch. (You can check your own longevity literacy by answering Lusardi and the TIAA Institute's questions at the bottom of this article.)
"It's a critical part of retirement planning," Lusardi said. "The first thing you need to do to start from the back, meaning you have to consider, 'How long do I have to provide for' ... then you can decide, 'How much can I save for retirement?'"
She added, "You can't provide for 30 years of retirement with 15 years of savings."
Family history versus statistics
Often, people base their decisions about their likely retirement spans based on their parents' or grandparents' experiences, Kolluri noted. But that doesn't take into account the critical changes in life expectancy that have occurred during the past several decades, with advancements in treating chronic diseases and medical services that are keeping Americans healthier for longer.
Some people focus on personal experience, he noted, like, "'Hey my grandma passed away at such an age, men at my family pass away at such an age,' while ignoring in that analysis that time has passed, medicine has changed," Kolluri said.
Of course, no one can know how long they'll live. But workers can examine data and statistics to help guide their savings decisions by creating expectations for their lifespans, Lusardi noted.
"We can make an educated choice, and certainly that is our main message about the data," she added.
Social Security and longevity
Another area where longevity literacy can have an impact is on Social Security, given that Americans can choose when to start claiming the benefit, beginning at age 62 or waiting until they are 70. There's a financial incentive to wait as long as possible, since your monthly benefit will grow the longer you wait, with payments maxing out at age 70.
Yet only 6% of U.S. workers wait until they turn 70 to claim Social Security, while 30% claim at age 62, when they will receive their smallest possible benefit amount.
To be sure, many workers take Social Security as soon as they can at age 62 because they have no other financial choice. But some Americans may be claiming the entitlements at that age because they misjudge their potential longevity, estimating they might die earlier than is statistically likely.
"It might not matter as much if you don't choose the right checking account, but if you don't withdraw [Social Security] well, that can be a problem," Lusardi said. "If people don't have a good assessment about how long they will live and they underestimate it, it might lead them to withdraw too early."
Prior research found that the typical worker is leaving $182,000 in lifetime discretionary income on the table by claiming before they turn 70 — income that many retirees could dearly use given that most Americans haven't saved enough for their golden years. The author of that analysis, Boston University economics professor Laurence J. Kotlikoff, noted that Americans "jinx themselves" by underestimating their lifespans, and then claim too early.
Planning to live to 90?
The longevity researchers note that a 65-year-old woman has a 40% chance of living to age 90, while that falls to 30% for men of the same age. Does that suggest that women, in particular, should plan for retirements that will last into their ninth decade?
"We think so," Lusardi said. "The message here is if you want the stability of income, you might have to think quite long — many people live longer than just the average."
You can test your own longevity literacy with the quiz below, developed by Lusardi and the TIAA Institute.
1. On average in the U.S., how long will a 65-year-old man live?
A. About 14 more years (age 79)
B. About 19 more years (age 84)
C. About 24 more years (age 89)
D. Don't know
2. On average in the U.S., how long will a 65-year-old woman live?
A. About 17 more years (age 82)
B. About 22 more years (age 87)
C. About 27 more years (age 92)
D. Don't know
3. In the U.S., what is the likelihood that a 65-year-old man will live at least until age 90?
A. About 10% (1 in 10)
B. About 30% (3 in 10)
C. About 50% (5 in 10)
D. Don't know
4. In the U.S., what is the likelihood that a 65-year-old woman will live at least until age 90?
A. About 20% (2 in 10)
B. About 40% (4 in 10)
C. About 60% (6 in 10)
D. Don't know
5. In the U.S., what is the likelihood that a 65-year-old man will not live beyond age 70?
A. Under 5%
B. Between 5% and 10%
C. Over 10%
D. Don't know
6. In the U.S., what is the likelihood that a 65-year-old woman will not live beyond age 70?
A. Under 5%
B. Between 5% and 10%
C. Over 10%
D. Don't know
(The correct answers for questions 1-5 are B.; the correct answer for question 6 is A.)