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Individuals underestimate their chances of survival through their 50s, 60s and 70s, potentially hindering their ability to plan their retirement

As individuals are given more control over saving for retirement and use of pension wealth, their ability to plan for the future is increasingly important.

In a new report, funded by the IFS Retirement Savings Consortium and the Economic and Social Research Council, IFS researchers draw on a large household data set to investigate individual survival expectations and their relation to health, wealth and other individual circumstances.

Comparing subjective (reported) expectations of survival with official (ONS) life table survival rates, researchers reveal large and systematic biases in individuals’ expectations. They find that:

  • 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 5–10 percentage points. For example, men born in the 1940s who were interviewed at age 65 reported a 65% chance of making it to age 75, whereas the official estimate was 83%. For women, the equivalent figures were 65% and 89%.
  • 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 (10–15 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% chance of making it to age 95, whereas the official estimate was 17%. For women, the equivalent figures were 37% and 24%.
  • While the pattern of ‘pessimism’ about surviving through their 50s, 60s and 70s is common across many groups of individuals, some groups are more ‘pessimistic’ about their survival chances than others. Widows and widowers show much greater pessimism than others at age 60. While their estimated chances of surviving to age 80 were 77% and 67%, respectively, their subjective reports implied a 49% and 39% chance, respectively, a gap of almost 30 percentage points in both cases.

Other key findings include:

Individuals’ survival expectations reflect known risk factors and health status:

  • Survival expectations are correlated with known risk factors such as smoking and parents’ ages of death. Those who currently smoke report an average 6–8 percentage points lower chance of surviving to an age 11–15 years ahead than people who have never smoked. Those whose mothers died at age 85 or older report an average 5–7 percentage point higher chance of surviving to an age 11–15 years ahead than those whose mothers died aged 60–64.
  • Beliefs about the probability of survival are also correlated with individuals’ actual age of death and respond to new diagnoses of health conditions. Those reporting a 10% or lower chance of survival to an age 11–15 years ahead had a 48% chance of dying in the following 10 years. Those who reported a 50% or greater chance of survival over the same time period had a 12% chance of death. A new cancer diagnosis was associated with a 5 percentage point reduction in the stated probability of surviving to an age 11–15 years ahead.

Implications for behaviour and policy:

Survival ‘pessimism’ is important in a context of increasing personal responsibility for, and control over, the accumulation of savings and their use in retirement.

  • Underestimation of chances of surviving through their 50s, 60s and 70s may mean that individuals save less during working life, and spend more in the earlier years of retirement, than is reasonable given their actual survival chances.
  • Pessimism may make individuals reluctant to buy annuities. An annuity priced according to average survival chances should represent a fair deal (or better) for around half of individuals. But given individuals’ own survival expectations, around two-thirds of individuals in their 60s would perceive an annuity priced according to average survival chances as offering a less than fair deal.
  • Optimism about survival at the oldest ages means that if individuals survive through their 80s, they may then be overly reluctant to spend down their wealth, potentially reducing their overall living standards.

David Sturrock, a Research Economist at IFS and an author of the report, said:

“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. 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.”

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