One of the trickiest parts about figuring out whether you can afford to retire apparently involves getting a clue about just how long you might live after you stop working.
More than one-half of U.S. adults surveyed — some 53% — could be putting their retirement readiness at risk because they don’t have a handle on what’s a realistic life expectancy, based on a survey for the latest annual Personal Finance Index conducted by the TIAA Institute and the George Washington University School of Business.
The Personal Finance Index is based on questions involving a variety of financial areas and had 3,582 respondents.
The new Insights Report from the TIAA Institute and George Washington University concluded that those who have more knowledge about overall life expectancy could indeed do a better job planning for retirement.
The survey attempted to gauge “longevity literacy” with a multiple-choice question regarding the life expectancy of men and women at age 60 in the United States. The question addresses the life expectancy in the population, not the respondent’s own life expectancy.
Three possible answers gave specific ages for life expectancy at age 60. And “don’t know” was another possible answer.
It was the first time the index tried to address longevity knowledge — specifically, life expectancyat age 60.
“Do people know how long they’re going to live?” George Washington University economist Annamaria Lusardi, director of the school’s Global Financial Literacy Excellence Center, asked during a webinar Jan. 17.
People, after all, could be more motivated to save aggressively and consistently if they realize that they could spend many years in retirement.
Underestimating potential longevity can lead you to think you’re better prepared for retirement than you might be, making you more willing to take a chance at retiring early in your late 50s or early 60s. Or you could kid yourself into thinking that you don’t really need to save as much money for retirement as you do.
How long will you live in retirement?
How well would you do? How long do you think that men who had already hit 60 could live? Would men make it to 76? Or age 82? Or age 88 — possibly living 28 years more — if they had reached age 60?
And what about women? Would women in this group be looking at a life expectancy of age 79? Or age 85? Or could they hit 91 — possibly living 31 years in retirement — if they had reached age 60?
The correct answer — given by 37% of respondents: Women can expect to live 25 more years, through age 85; men can expect to live 22 more years, until 82.
The survey noted that 25% of respondents underestimated how long many people would live, which could be dangerous if they’re planning to retire early and end up living longer; 28% said they did not know; and 10% overestimated a lifespan, which might lead to saving more or working longer and theoretically could put one at less risk in retirement.
Women, perhaps not surprisingly given their caregiving roles in many families, were more likely to understand how long life can last for many. Men tended to underestimate life expectancy, based on the survey. The report noted that 43% of women demonstrated strong longevity knowledge compared with 32% of men.
All sorts of misconceptions and mishaps can contribute to a shaky foundation in retirement — unexpected job losses in your 40s or 50s, changes in pension policies, lack of knowledge about how much Social Security benefits would cover.
When does the bigger Social Security payout arrive?
Social Security is grabbing many of the headlines, but most retirees need to tap into their own savings — and, if they’re fortunate, a pension check — to maintain a decent standard of living in their 70s and 80s.
Beginning this month, more than 65 million Social Security beneficiaries will receive an 8.7% cost of living adjustment — that’s the highest boost in more than 40 years. The adjustment, which reflects the incredible surge in inflation, was 5.9% last year. But in recent years, when inflation was low, adjustments had been 2% or less for several years.
On average, Social Security benefits will increase by more than $140 per month. Many receiving benefits have already seen those higher checks. Beneficiaries born between the 21st and the 31st of the month will see checks that reflect the adjustment on Jan. 25.
The average Social Security retirement benefit in 2023 is an estimated $1,827 a month.
Social Security started automatic annual cost-of-living allowances in 1975. The change was enacted by legislation that ties COLAs to the annual increase in the Consumer Price Index.
Many don’t save at all for retirement
Overestimating how much Social Security will cover — and underestimating how much personal savings you need — can trigger financial headaches later in life.
The latest Personal Finance Index indicated that 28% are not saving on a regular basis for retirement — and 47% of those saving have not tried to determine how much they need to save for retirement.
The Federal Reserve’s 2021 Survey of Household Economics and Decisionmaking, which measures the economic well-being of U.S. households and identifies potential risks to their finances, indicated that one-fourth of non-retired adults have no retirement savings. And among non-retirees 60 and older, 13% have no retirement savings, and 48% do not think their retirement savings are on track.
The pandemic led some to retire earlier than expected. The Federal Reserve survey of households stated that 25% of adults who retired in the prior 12 months — and 15% of those who retired one to two years ago — said that factors related to COVID-19 contributed to when they retired.
Working longer is always viewed as an option that can help people face longer lifespans and a lack of savings. But if the last few years taught us anything, it should be that much is way beyond our control. Better to get a clear handle on what you can when you can.
