What Your Clients Don't Know About Longevity Could Hurt Their Retirement

Although it might be easier to go along with what a client believes, a longevity-literate client can choose a more realistic retirement age, save more, and make a better decision about when to claim Social Security. In the long run, each of these decisions may benefit the asset-compensated advisor.

"There's an incentive to increase knowledge because it provides a motivation to save more," notes Kolluri. "Clients can also be prompted to think about the household unit versus the individual. The probability that one of the two spouses is going to outlive the other is pretty high, and there's a high chance that one will live to 95."

In fact, for higher-income clients the probability that one spouse in a couple will live beyond age 95 is over 40%.

Spreading Longevity Knowledge

One of the study's authors, Annamaria Lusardi, professor of economics and accountancy at George Washington University, believes that the government should do more to provide basic longevity literacy education.

"One of the most important decisions people have to make is when to claim Social Security, she says. "Understanding longevity seems like a critical piece for informing people. It's time to pay attention to that too."

Jason Fichtner, a former chief economist for the Social Security Administration who is now vice president and chief economist at the Bipartisan Policy Center and senior fellow with the Alliance For Lifetime Income, believes that the SSA can do more to promote factual information that can be used to help workers make better claiming decisions by promoting consumer guides that feature information about longevity.

It's perhaps more important to provide longevity literacy education to younger Americans than to near retirees. "If you have a long time to prepare for retirement, then it's going to be much easier," notes Lusardi. "Having good information about longevity — getting a sense that life is very long — will change the trajectory of young people."

A simple way to increase longevity awareness is to add information in retirement statements of a defined contribution plan. This may not be as farfetched as it seems.

"ESG awareness started 10 years ago — now it's part of statements," notes Kolluri. "Is there a connection between knowledge and action? Eighty-one percent of respondents who answered correctly were currently saving for retirement through their employer plan versus 57% who got it wrong. Forty percent of those with higher longevity literacy were confident about retirement versus 25% of those with lower literacy."

Investment companies and recordkeepers have a clear incentive to provide information about longevity.

A catalyst for advancing knowledge of longevity is the possibility that retirement plan defaults will begin offering guaranteed income to workers. Awareness that a retiree can expect to receive this income for decades can help participants recognize its value.

Women Have Higher Longevity Literacy

Longevity illiteracy is particularly costly for women if results in lower savings rates or early Social Security claiming. Fortunately, women appear to have better longevity literacy scores than men. Kolluri notes that "43% of women demonstrated an accurate understanding of longevity compared to 32% of men."

Unfortunately, while women better understand how long they are likely to live in retirement, they also tend to have lower overall financial literacy scores. This likely occurs when married couples choose to split tasks, with married men often taking on the bulk of financial decisions.

Kolluri notes that women often are responsible for more health care decisions, including care of older relatives. "One of the reasons why we need to help women is that they are aware they are going to live longer," she said, "but they're often less capable of preparing financially for it."