Projecting how long your clients think they’ll live is a crucial exercise in retirement planning.
An accurate estimate of life expectancy could determine, for example, their appropriate savings rate or whether or not they should buy an annuity later in life. The standard theoretical model predicts that individuals make unbiased estimates of their life expectancy based on concrete information, such as age, gender, family history, health and lifestyle.
But a recent paper, Life Ex-pectancy as a Constructed Belief: Evidence of a Live-to or Die-by Framing Effect, suggests that life expectancy estimates also can be affected by the way in which the question itself is worded.
Researchers from three U.S. universities conducted experiments with more than 2,000 adults in which half of those surveyed were asked to determine the probability of their living to a certain age; the other half were asked to estimate the chances of their dying by a certain age.
All of the participants provided estimates on whether they would live or die by the time they were 75, 85 and 95 years old.
People considering how long they would live were more optimistic, estimating that they had a 55% chance of being alive at age 85. Those thinking about when they would die were more pessimistic, however, envisioning a 68% chance of dying at 85 — or just a 32% chance of being alive.
THOUGHTS OF DEATH
The “live to” framing of the question appears to prompt positive thoughts about the future, whereas the “die by” framing produces thoughts of death, thus leading to shorter estimates of lifespan.
Overall, there also was a 10-year gap in the median expected age of death (roughly 85 years for the live-to group and 75 years for the die-by group). A positive framing of the question, in other words, produced a 10-year increase in how long people expected to live.
“This 10-year difference in the median expected age of being dead or alive not only is statistically significant,” the report notes, “but also highly meaningful to a number of important life decisions, such as how to finance one’s consumption during retirement.”
One of the most important choices clients face when making such decisions is what percentage, if any, of their assets should be allocated to the purchase of some form of life annuity — a product that provides insurance against outliving their savings.
In this instance, those who judged themselves more likely to live to age 85 rated their likelihood of buying a life annuity at 39%. However, just 26% of those who saw themselves as less likely to live to age 85 expected to make such a choice.
Not that the study revealed any particular enthusiasm for life annuities overall. On average, people rated themselves as being only 33% likely to buy a life annuity, with most respondents expecting to be managing their money in retirement themselves.
Clearly, language plays an important role when addressing retirement-income planning. The way the longevity question is framed can have a significant impact on decisions about future financial outcomes. IE