Young people’s pessimism about their longevity partly explains why they under-save for retirement, new research from Bayes Business School suggests.
Conversely, very old people tend to be overly optimistic when making retirement saving decisions based on their longevity.
However, the impact of these beliefs, the study concludes, is less than that suggested by earlier research. Factors such as ready access to surplus cash, a wish to pass on a legacy and health risks are more important.
The researchers compared data on survival beliefs from the US Survey of Consumer Finances with survival probabilities from the US government’s 2019 actuarial data period life table. The research is published in the journal Insurance: Mathematics and Economics.
While younger people generally underestimate their likely lifespan, the study suggests, we become increasingly optimistic as we age.
On average, those who rely on their own subjective ideas of how long they will live save around 1% less before retirement and 4% more after retiring than people who take a more evidence-based approach to saving.
The study found that the annuities purchased by people relying on subjective survival rates are typically around 8% lower than those bought by people who base their decision on objective data. Annuities convert savings into an annual pension paid to the recipient.
The desire to leave a legacy to loved ones, however, had an even bigger impact on annuity decisions.
Annuities, survival beliefs and financial literacy: How can young people better prepare for retirement?
Co-author Dr. Iqbal Owadally, Reader in actuarial science at Bayes Business School (City St George’s, University of London), said, “It is important to look at people’s personal beliefs because this drives how much people save, invest and plan for retirement. However, our study reveals a complex relationship between subjective survival beliefs and financial behavior.”
Key recommendations from the study include:
- As subjective survival beliefs alone cannot fully explain annuity decisions, financial modeling should integrate health expenditure risks to provide a more realistic view.
- The financial services sector should develop more flexible annuity options, including deferred annuities that can be purchased at various life stages. This could help mitigate the effects of survival pessimism at younger ages.
- Further research is needed to explore how subjective survival beliefs may be influenced by broader economic conditions, such as inflation and interest rates.
Co-author Steven Haberman, professor of actuarial science at Bayes, said, “Rather than just focusing on survival misperceptions, policymakers and financial advisors should adopt a wider approach to addressing people’s preparedness for retirement. This would include measures to improve financial literacy among young people on topics such as life expectancy and retirement preparedness.”
Co-author Dr. Douglas Wright, senior lecturer at Bayes, said, “Given survival beliefs are not a strong driver of decision-making around retirement products, policymakers may need to focus on other barriers such as accessibility of products, financial illiteracy and trust in pension providers.”
Co-author Seung Yeon Jeong, who took part in the research as a Ph.D. student at Bayes, said more flexible annuity options are needed, including deferred annuities that can be bought at different ages. “This could reduce the impact of survival pessimism at younger ages and better prepare people for retirement,” she said.