When it comes to financial literacy, women often lag behind men in surveys. However, there is one area where women seem to have an advantage: “longevity literacy,” or understanding how long we can expect to live.
Having a good grasp of longevity is crucial for effective retirement planning. If you overestimate your lifespan, you may end up retiring too late or being too frugal with your finances. On the other hand, underestimating your longevity could leave you running out of money.
In a recent study by the TIAA Institute, only 43% of women correctly estimated the life expectancy of 60-year-old women in the U.S. (The correct answer was 85.) Meanwhile, only 32% of men chose the correct answer for the life expectancy of 60-year-old men, which was 82. Men were also more likely than women to underestimate life expectancy, and this poses a significant problem for both genders.
For example, a man who expects to pass away in his 70s might withdraw too much from his retirement funds or start collecting Social Security benefits too early. This could leave him, as well as his surviving spouse, with insufficient income in later years.
“A lot of people do okay in the early years of retirement,” says actuary Steve Vernon. “But it’s often in their late 70s and 80s that they start to struggle.”
Understanding Life Expectancy
According to Vernon, the life expectancy statistics that are commonly reported in the news are not the ones that matter for retirement planning.
For example, the Centers for Disease Control and Prevention recently announced that the U.S. life expectancy had dropped for the second consecutive year, citing a figure of 76.4 years. However, this number represents life expectancy from birth and includes factors such as infant mortality and premature death due to accidents, diseases, overdoses, homicides, and suicides.
Longevity is a persistent factor. The longer you live, the longer you are likely to continue living. For instance, the Society of Actuaries states that one out of three men and one out of two women in their mid-50s will live to be 90. Furthermore, there is a 50% chance that at least one spouse from a heterosexual married couple at age 65 will still be alive at 92.
With longer lifespans comes the concept of “longevity risk,” which refers to the possibility of outliving your savings. Addressing and understanding this risk is crucial for retirement planning, yet most Americans fall short in this area, according to Surya Kolluri, head of the TIAA Institute.
The Lack of Longevity Literacy
A survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center found that over half of Americans lack an understanding of how long people tend to live in retirement. The survey included more than 3,500 adults nationwide and is known as the Personal Finance Index, which traditionally measures financial literacy. In the latest survey, researchers added a question about longevity, providing multiple-choice answers.
Men were asked about the life expectancy of 60-year-old men in the U.S., while women were asked about the life expectancy of 60-year-old women. The correct answers were determined based on Social Security actuarial data from 2019.
Both men and women were equally likely to say they didn’t know the correct answer or choose an answer that overestimated life expectancy by six years. However, 31% of men selected an answer that underestimated life expectancy by six years, compared to 19% of women.
Researchers are uncertain as to why more women than men demonstrated longevity literacy, but they have proposed a few hypotheses. One theory is that women are more involved in caregiving for older relatives and thus have a greater understanding of the realities of aging. Another theory is that women are aware they live longer than men and that wives often outlive their husbands.
“I think most women are just more in tune with longevity than men are and maybe are concerned about it,” says Vernon.
Retirees who answered the longevity question correctly were more likely to report that making ends meet was “very easy” and express “very confident” that they had enough money to sustain them throughout their lifetimes, compared to those who lacked longevity literacy, the researchers found.
Protecting Against Longevity Risk
According to Vernon, the most effective way to mitigate longevity risk is by delaying the claiming of Social Security benefits.
While Social Security retirement benefits can start as early as age 62, applying before your full retirement age (which currently ranges between 66 and 67) means receiving a permanently reduced check. However, delaying your application beyond full retirement age can result in an 8% increase in benefits for each year you wait, up until your benefit maxes out at age 70.
Delaying is particularly vital for the higher earner in a married couple since their benefit determines what the surviving spouse will receive after the first spouse passes away.
A paper published in 2022 by the National Bureau of Economic Research found that almost all American workers ages 45 to 62 should delay their applications beyond age 65 to maximize their benefits, with over 90% advised to wait until age 70. However, only around 10% of applicants currently choose to wait that long.
“Most people just don’t understand how long they could live in retirement, and they don’t plan for it,” says Vernon.
This article was written by NerdWallet and was originally published by The Associated Press.
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Liz Weston, CFP® writes for NerdWallet. Email: [email protected]. Twitter: @lizweston.
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