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How Long You Think You Will Live is Connected to Worklife

Every day we find new factors that are affecting participants’ decisions regarding their retirement confidence, savings behavior and worklife. A common theme is that perception is more important than reality. Behavioral economists frequently talk of effects of “framing,” “anchoring” and “subjective self-perceptions” on decision-making and behavior.

Well, there’s another example in a recent study released by the Boston College Center for Retirement Research, “How Do Subjective Longevity Expectations Influence Retirement Plans?” Drs. Mashfiqur R. Kahn, Matthew S. Rutledge and April Yanyuan Wu found a correlation between how long someone thinks they will live and how long they actually remain active in the workforce.

The study found a statistically significant relationship between workers’ “subjective life expectancy” (how long they believe they will live) and expectations of when they will retire. The paper concluded that, “As individuals become more optimistic about living to ages 75 or 85 (relative to their actuarial probability of living to those ages), they push out their planned retirement dates and increase their expectations about working to the milestone ages of 62, 65, and Social Security’s Full Retirement Age.”

The report also notes: “Individuals who expect to live longer are expected to retire later, for at least two reasons. First, a longer life requires greater wealth to finance consumption (Chang 1991, Kalemli-Ozcan and Weil 2010). Second, greater longevity is likely associated with better health during one’s working years, making continued work more feasible.”

However, despite gains in longevity, an individual’s perceptions are do not always keep up with reality. The significance of this is that people’s under-saving could be getting worse over time. Given that one strategy for retirement readiness is to delay retirement and work longer, these findings are important. The authors observed, “Our results suggest that policy reforms aimed at encouraging longer work lives must effectively target communication on the gains in life expectancy.” This communication, to a large degree, falls on the DC plan educators — including, of course, advisors.

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