Underestimating Your Life Expectancy: Don’t Let Your Brain Shrink Your Retirement Benefits

rick kahlerHow long do you expect to live? In last week’s column on people who opt to start Social Security benefits at age 62, I explored what appears to be a common belief shaping that decision. Many people apparently assume they won't live long enough to reach their breakeven age, the point at which the total benefits received starting early would be equal to those received starting later.

Yet Social Security Administration (SSA) data suggests that the average mortality age is seven to nine years beyond the breakeven age, meaning many people will live significantly longer than they expect.

Why do people so consistently underestimate their lifespan? Their thinking is influenced by the money scripts, financial circumstances, stories, and emotions that drive a person’s cognitive biases, or mental shortcuts. Here are some examples:

Availability Heuristic. We often rely on immediate examples that come to mind when considering a specific topic or decision. The untimely death of a family member or friend, or media coverage of premature deaths, are more memorable and emotionally impactful than the uneventful deaths of people living well into their 80s and 90s. This may encourage people to overestimate the likelihood of dying young.

Optimism Bias and Pessimism Bias. These are our tendencies to believe that either positive or negative outcomes are more likely for ourselves than for others. Pessimism bias, which shapes my own thinking, is what my wife describes as “going to the dark side” almost involuntarily. It can foster a bleak view of one’s health and longevity. This bias can also cause us to over-emphasize personal experiences and family health histories that suggest the possibility of shorter lifespans.

Present Bias/Temporal Discounting. We tend to give stronger weight to payoffs that are closer to the present time than to those in the future. This bias can make the immediate financial gain of taking benefits at 62 seem more attractive than the delayed, but larger, benefits at 70. The certainty of smaller payments now can outweigh larger payments later, even though waiting would be more beneficial in the long run.

Anchoring Effect. We often rely too heavily on the first piece of information encountered (the "anchor") when making decisions. Learning that 62 is the early eligibility age for Social Security benefits may anchor someone on this age as the appropriate time to apply, without fully considering the financial benefits of waiting. It then becomes difficult to “pull up the anchor” and adjust plans based on new information, such as the fact that 57% of people at age 62 will live longer than the breakeven age of 78.

Status Quo Bias. This is a preference for the current state of affairs, where changes from this baseline are perceived as a loss. Someone who has focused on 62 as the ideal retirement age will resist altering their retirement plans even when they learn that delaying would be in their financial best interest.

Finally, and ironically, it’s possible that one reason people underestimate their life expectancy is our reluctance to think or talk about death. Given how hard it is to discuss old-age care options and estate planning, maybe we simply can’t imagine our own final years well enough to think clearly about providing financially for them.

Yet failing to think about living into our 80s and 90s can have significant negative financial implications. Many people who opt to take Social Security early are trying to get the most return possible from their lifetime of work and the taxes they have paid into the system. Yet, given the difference between our assumptions and the statistics about life expectancy, early filing can result in exactly the opposite.

Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.

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