When it comes to retirement planning, many Canadians are flying blind because we have a tendency to underestimate how long we’ll live.
One genetics professor from Harvard has suggested that the first person to live to 150 is likely already alive. But I suspect they’re very young today – and no one reading this column will find out if that prediction comes true.
Nonetheless, according to a new paper published in the Journal of Behavioural and Experimental Economics, most people tend to underestimate how long they’ll live, especially as they get older. Underestimating your lifespan could lead to undersaving for retirement. After all, if you think you’ll only live to 80, you might not save enough to last until 90 or beyond.
Here’s a quick thought experiment you should do right now: Take a moment to estimate the age at which you think you’ll die. Now, separately consider your ideal retirement age and how long you’ll need your money to last after retirement. Is there a mismatch between these two estimates?
The study found that many people’s answers to these questions didn’t align perfectly. You may want to consider using the higher number in your financial planning assumptions to err on the side of caution. Running out of money before running out of life is a far greater problem than dying rich.
For a more objective estimate of your life expectancy, you could try the “Living to 100″ calculator. (Warning: you’ll have to provide your email address to get your estimate.) This tool takes into account various lifestyle and health factors, providing a more nuanced prediction than a simple guess. It considers elements like your diet, exercise habits, family history, and stress levels to give you a personalized estimate.
Remember that this is just an estimate, but it will be more scientifically backed than the number you might have in your head. I was a bit surprised to find that my estimate was six years longer than I thought it would be. That was motivating.
And that follows one of the findings from the study: Those who expect to live longer are more likely to save voluntarily for retirement. It’s as if optimism about longevity fuels better saving habits. So, maybe it’s time to embrace a more positive – and realistic – outlook on your future. Your retirement account might thank you for it.
Education plays a crucial role, too. The study found that people with higher education levels tend to have more optimistic longevity expectations. This highlights the importance of financial literacy and education in retirement planning.
It’s no surprise that better self-reported health was also associated with higher expected longevity. But here’s the kicker: This connection underscores the link between taking care of your health and planning for a longer retirement. In other words, that gym membership might be a better investment than you thought.
Income, unsurprisingly, affects how people view their future. Higher income was associated with more optimistic longevity expectations. However, there is a catch. A significant portion of participants reported saving either nothing or less than they should for retirement, regardless of income. This suggests that income alone doesn’t guarantee retirement preparedness.
So, what’s the takeaway from all this? Retirement planning isn’t just about crunching numbers. It’s about understanding yourself, health, your family history and your behavioural tendencies. It’s about being realistic, not pessimistic, about your longevity. And most importantly, it’s about taking action based on well-informed estimates.
Start by reassessing your longevity expectations. Are you being too pessimistic? Use tools like the Living to 100 calculator or talking to your doctor to get a more accurate picture. Then, take a hard look at your savings. Are you putting enough aside?
Consider your health as part of your retirement plan. Investing in your well-being now could pay off in longer, healthier retirement years.
Retirement may seem far off, but the choices you make today will shape your golden years. So take charge, stay informed and remember – your best retirement starts with a realistic view of how long it might last. Don’t shortchange your future self by underestimating your longevity.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
