New research finds many people are not saving enough for their retirement for an unexpected reason.
The study results determined that it is common for people to live longer than they had anticipated.
Living Longer Than Expected
People in their 50s and 60s underestimated their odds of living beyond the age of 75 years by around 20 percent. Another 10 percent wrongly did not expect to live to be 85 years old, said the research. Widows and widowers were particularly likely to think that they would live shorter lives than they actually did.
While improved longevity should be considered good news, there is a catch. The longer life spans are potentially harmful to the ability of those people to save enough money for their retirement.
Can People Live Long and Prosper?
The Institute for Fiscal Studies, a think tank, conducted the research. They determined that understanding longevity is becoming an increasingly important retirement planning factor. This is particularly true as a result of the newly introduced pension freedoms. These give consumers added control over the funds they save for their retirement.
The study found that while younger people don’t feel they will reach a very old age, that changes with time. As people age, said the study, their optimism about their longevity rises. This occurs to the point that people who are in their late 70s and in their 80s will often overestimate their chances of survival above the age of 90 years.
How it Affects Savings
The IFS used a comparison of data from the Office for National Statistics. They examined several age ranges. The IFS stated that pessimism over longevity could reduce a person’s likelihood of buying annuities. Annuities priced based on average survival rates may represent a fair – or better than fair – deal for about half of everyone who would purchase them.
However, because people don’t think they will live as long as they statistically will, about two out of every three people in their 60s would purchase an annuity priced for average chances of survival would not get a good deal out of it.
“As individuals are given more responsibility for saving for their retirement, and more freedom over how they use those savings in their later years, it is a particular concern that many are systematically misjudging their longevity,” said IFS research economist, David Sturrock, one of the report’s authors.
“When people underestimate their chances of surviving through their 50s, 60s and 70s, they may save less during working life, and spend more in the earlier years of retirement, than is appropriate given their actual survival chances,” said Sturrock.