Getting Longevity Wrong Can Put a Hitch in Retirement Planning

Individuals need to know the right number in order not to outlive their retirement savings, as well as to prepare in time for financial dependents.

Employees are living longer, but many fail to consider increased longevity in their plans for retirement.

The Society of Actuaries (SOA) released a study reporting that half of consumers are either underestimating or overestimating their life expectancy by five years or more, all based on factors including health, income, lifestyle and even family history. Those underestimating their lifespan face a greater risk of outliving their retirement savings, while those overestimating it may fail to prepare in time for financial dependents.

Dale Hall, managing director of research for the Society of Actuaries, believes the survey can elicit retirement plan participants to start considering their financial future, given the factors that are most relatable to them. “The survey can help participants think about a strategy or even incorporate one,” he says. “What types of assets should I have in place? How can I add a guaranteed level of income through pension or annuities, or another secure tool?”

Unsurprisingly, according to the report, one of the major factors determining longevity is health. Those who had a self-reported status of being less healthy were more likely to underestimate their life expectancy by five or more years. But health isn’t a sole indicator when it comes to longevity, and Hall explains that many people will live long lifespans even with unhealthy or poor health statuses. “People are underestimating what their life expectancy will be and may need to do a self-reevaluation of what they want their retirement to look like,” he adds.

When it comes to wealth, while the general rule of thumb is to save $1 million for the retirement years, this figure is largely personalized by individuals themselves. A MagnifyMoney survey found that while most respondents agreed a seven-figure nest egg would be enough, the reality is that this depends on what retirees expect to allocate toward housing, discretionary costs or any remaining debts.

“You can have these common rules of thumbs, but it highly depends on each individual and their goals, and their capacity to be saving throughout their life,” states Lauren Perez, a Millennial spokesperson at MagnifyMoney. “It depends on how you envision your retirement, and what situation you’re in now.”

For example, according to the report, while most say $1 million in savings may be enough to afford a 20-year retirement, 33% of Millennial respondents reported they would be comfortable retiring with upwards of $1.5 million. Twenty-six percent of Baby Boomers, on the other hand, said no amount of money could be enough to set their retirement worries at ease. “The longer your retirement, the more money you’ll need in savings,” Perez notes. She suggests that what participants contribute into their retirement plan accounts may reflect how long in retirement they think they’ll live.

“Good retirement planning should take into account preparing your assets and your retirement for well beyond that life expectancy,” Hall says.

In addition, unexpected events such as medical expenses, downturns in the market or even a new roof for the home “are events that are hard to predict,” Hall adds. “And it makes planning for retirement a challenging process.”

According to the SOA study, 23% of respondents overestimated their longevity by five years. Hall says this can be a problem when planning for retirement as well, as people who do so may delay organizing their assets or updating their beneficiaries because they believe they still have time.

In addition, people who overestimate their longevity and are cautious about how much of their assets they spend in retirement may miss out on having the lifestyle they desire.

It is important for plan sponsors to help participants accurately estimate their longevity in planning for retirement. Sources say the first step is including lifetime income disclosures on retirement plan participant statements, something now mandated by the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

For participants who believe they have underestimated their savings and want to get back on track, MagnifyMoney suggests the 25x rule: employees aim to save 25x their annual expenses, which would then cover 25 years of retirement. For example, if a participant calculated $70,000 in annual spending throughout retirement, the 25x rule means they should save $1.75 million.

Perez argues that while retirees and workers cannot explicitly gauge their longevity, recognizing lifestyle choices can give individuals a ballpark on appropriate savings levels. “We can’t really estimate our accurate longevity,” she says, “but if you take into account your lifestyle, that will give you a better estimate of how much you need to save.”