This article by Lilach Frenkel, Director of Product Innovation at CAAT Pension Plan, analyzes the ways longevity literacy and longevity models can help when planning how much a retiree will need to save to retire comfortably. It shows how individuals with strong longevity literacy tend to be more financially prepared in retirement and how longevity models can be a key tool for helping people understand how long they will need to plan for.
Longevity literacy
Over the last century, there have been significant improvements in life expectancy, leading to longer lifespans for people. As a result, individuals now spend more time in their retirement years, making retirement planning more crucial than ever before. A key aspect of this planning process is having longevity literacy. Understanding literature and modeling related to life expectancy and longevity becomes essential in determining a financially feasible retirement age, deciding how much to save each year in advance of retirement, creating a long-term retirement budget, and selecting suitable retirement products that align with an individual’s needs and lifestyle. According to an OECD study, life expectancy at the average retirement age has increased by almost a decade since the 1970s1.
Perceptions of how long people will live, however, have not kept up with actual trends. A recent study2 spanning Canada, the US, and the UK found that people tend to underestimate their expected lifespan on average by 4.7 years. The underestimation is more pronounced for women, who underestimate their life expectancy by about 6.1 years than for men, who underestimate by 2.5 years.
The OECD study finds people will, on average, spend somewhere between 20 to 25 years in retirement; however, a significant proportion of the population will spend even more than 25 years in retirement. In Canada, financial planning guidelines recommend assuming a retirement horizon where the likelihood of outliving retirement assets is no more than 25%3. This translates into a retirement horizon of 30 or more years. Underestimating the number of years spent in retirement by almost five years could significantly impact a retiree’s financial situation in the latter part of retirement.
It is important to note that those who greatly underestimate life expectancy are also those who are the least financially prepared for retirement; underestimating life expectancy by about 7.2 years, well above the average underestimation of 4.7 years2. This highlights the need for accurate planning and awareness to ensure a secure financial future.
On the other hand, longevity literacy and knowledge are positively correlated with retirement readiness. Those Individuals who possess a good understanding of longevity more often plan and save for retirement consistently during their working years, leading to greater financial security in retirement. Moreover, there are retirement products that offer “lifetime income” (income payable for life) which can mitigate the risk of retirees outliving their assets. Understanding how long a person might spend in retirement and some of the related uncertainties is important information when deciding whether to include such a lifetime income product in a retirement income portfolio.
Introducing Longevity Modelers
A longevity modeler can help provide information and raise awareness as to how long a person might expect to spend in retirement. Optimum Pensions' Lifespan Calculator is an example of such a modeler designed to help users estimate their retirement horizon and how long their retirement income should last. Once basic individual information is entered, the modeler shows how many years retirement is expected to last (at varying likelihoods). The modeler provides:
- A basic estimate of the retirement horizon using industry averages; as well as
- A more advanced version once additional personal information is provided (such as height, weight, smoking, and exercise habits).
Having insight into an appropriate range of how long retirement may last is key to a robust retirement plan.
Longevity Awareness
To summarize, longevity literacy and modeling raise awareness of how many years retirees should expect to spend in retirement and in doing so helps promote retirement readiness. These tools help shape the best outcomes in the retirement planning process and within key decisions throughout the process, including how much to save annually in advance of retirement, how much to draw down each year once retired, and what portion of retirement assets to convert to products that offer lifetime income. Moreover, as life expectancy and longevity increase, the retirement planning journey continuously evolves. And so, such literature and modeling can be further expanded to create a more nuanced understanding of long-term care within the retirement years, including the likelihood and expected duration.
And while one size does not fit all and each situation is unique, having access to robust and unbiased longevity literature and modeling improves retirement security and readiness for all.
References:
- https://www.economist.com/graphic-detail/2023/03/27/retirement-has-become-much-longer-across-the-rich-world
- https://www.clubvita.net/us/news-and-insights/lifestyle-and-retirement-perception-survey-2022
- PROJECTION ASSUMPTION GUIDELINES 2023 (fpcanada.ca)
- https://www.tiaa.org/content/dam/tiaa/institute/pdf/insights-report/2023-01/longevity_literacy_financial_literacy_and_retirement_readiness.pdf