Advisers need to have a better grasp of how long clients will live in order to make successful retirement plans, according to research from the Institute for Fiscal Studies.
A report published today compares how long people expect to live with the Office for National Statistics’ survival rates.
The study reveals large and systematic biases in individuals’ expectations that are important as individuals have more control over their pension wealth.
Individuals from a range of ages underestimate their chances of survival to ages 75, 80 and 85, on average.
Those in their 50s and 60s underestimate their chances of survival to age 75 by around 20 percentage points and to 85 by around 5 to 10 percentage points.
For example, men born in the 1940s who were interviewed at age 65 reported a 65 per cent chance of making it to age 75, whereas the official estimate was 83 per cent. For women, the equivalent figures were 65 per cent and 89 per cent.
Individuals in their late 70s and 80s overestimate their chances of surviving to ages 90, 95 and above, on average.
This optimism becomes larger at older ages, from 10 to 15 percentage points when looking at age 95, and is larger for men than for women.
For example, men born in the 1930s who were interviewed at age 80 reported a 32 per cent chance of making it to age 95, whereas the official estimate was 17 per cent. For women, the equivalent figures were 37 per cent and 24 per cent.
IFS research economist David Sturrock says: “As individuals are given more responsibility for saving for their retirement, and more freedom over how they use those savings in their later years, it is a particular concern that many are systematically misjudging their longevity.
“When people underestimate their chances of surviving through their 50s, 60s and 70s they may save less during working life, and spend more in the earlier years of retirement, than is appropriate given their actual survival chances.”
He adds: “In contrast, people who overestimate their survival chances at the oldest ages may show an undue reluctance to spend their remaining wealth near the end of life.
“By misjudging their longevity, individuals risk having a lower standard of living in retirement than would otherwise be possible.”