Americans Are Bad at Guessing How Long They’ll Live -Josh Zumbrun

One of the great economic challenges facing both policy makers and individuals is figuring out how to plan and pay for retirement. The challenge is that nobody knows, least of all people themselves, how long they’re going to live.
In 1992, researchers at the University of Michigan‘s Health and Retirement Study began asking people in their late 50s to estimate their odds of living to the age of 75, and have followed them since. New research, being presented today at the Brookings Institution, shows just how poor a job those initial respondents have done.

Among the people who thought they had no chance of living to age 75 (presumably, a group in very bad health in their late 50s), nearly half of them–49%–actually reached the age of 75.
Among people who gave themselves 50-50 odds, a full 75% actually lived to age 75. In fact, aside from people who gave themselves 90% or 100% odds of living to age 75, nearly everyone was too pessimistic about their chances. (Though people who give themselves 100% odds aren’t being terribly realistic.)
The paper’s authors Katharine Abraham from the University of Maryland and Benjamin Harris from Brookings, are presenting the data as part of a conference on retirement security. Their paper suggests that many people aren’t necessarily planning out their retirement savings in the right way.
People have only a vague sense of their odds–those who gave themselves 0% chance actually were less likely to live to 75 than those who gave themselves higher chances–but that means people probably aren’t planning how to stretch their savings into their late 70s and 80s. The odds are they could have a pretty long retirement. So many retirees face the unexpected risk of running out of retirement savings early, what economists call “longevity risk.”
Ms. Abraham and Mr. Harris think there’s an elegant solution for this problem of “longevity risk.” People could buy so-called longevity annuities. At age 60, you could take $100,000 and buy the annuity. Then at age 75 you would start getting an annual income of about $1,575 a month or $19,000 a year for the rest of your life. If you wait until age 85 to start collecting, the payments are even more substantial, $4,500 a month or $54,000 a year for the rest of your life.
If you knew you were going to live into your 100s, this would obviously be the way to go. But for most people $100,000 is a big, if not unimaginable, chunk of money to set aside at age 60 and not get back for a quarter century. A lot of people would rather have that money now. After all, what are the odds of actually living to 75? Or 85? They can’t be that good, right?

Culled from WSJ