Longevity literacy promotes understanding the need for lifetime income

next issue no. 10: Participant engagement

Financial literacy remains a key area for research¹

The TIAA Institute-GFLEC Personal Finance Index continues to be a significant resource in examining financial literacy levels among U.S. adults and how that relates to their financial well-being, including retirement readiness. This year, for the first time, the study included specific research on longevity literacy, i.e., knowledge of how long people tend to live in retirement. The overall findings show us that as with financial literacy, retirees with strong longevity literacy were more likely to plan and save for retirement while still working compared to those with poor longevity literacy, and they tend to experience better financial outcomes in retirement.

To highlight how much of a challenge this can be, according to the Society of Actuaries, for a 65-year-old couple, there is a 50% chance that one of the two will live to be 93 years old, and a further 25% chance that one will make it to 97. The data shows that one-in-three men, and one-in-two women who are currently in their mid-50s, can expect to live to be 90 years old.²

While overall life expectancy in the U.S. has fallen from its peak, there is still a lengthy and growing period of retirement that people need to be prepared for. The covid pandemic has been a significant driver of the negative trend in U.S. life expectancy in 2022, pushing overall life expectancy at birth to its lowest level since 1996. The other primary driver has been the ongoing opioid crisis. Life expectancy peaked at 79.9 years in 2020 for women in the U.S. and 74.2 years for men.³

The lack of retirement savings across the general U.S. population and coming retirement crisis have been a focus for TIAA and Nuveen for some time, and this new research highlights how expanding education efforts to include longevity literacy should be a major focus for stakeholders.

The table shows that people with higher levels of financial literacy are more likely to be planning and saving for retirement and to be confident about their retirement income prospects. The same holds true among those with strong longevity literacy compared to those with poor longevity literacy.

It is important that plan sponsors have financial literacy programs as part of their ongoing human resources programs, to educate employees to make sure that they are taking advantage of all the options available to them. Employees that are not saving simply may not be aware of the options available to them, such as company matching, which could have a significant benefit in building retirement assets.

Regarding longevity literacy specifically, the study found that over half of U.S. adults either do not know or underestimate how long people tend to live in retirement. This is a significant share of the population that may well be underprepared for retirement. Without a clear understanding of how long retirement might last, they may not be saving enough throughout their careers, or they could spend their savings too quickly when they reach retirement.

The study shows that women tend to have better longevity literacy than men—they are more likely to know life expectancy at age 60 and less likely to underestimate it compared to men. This is very interesting given that a consistent finding over the first six years of the P-Fin Index is that financial literacy among women tends to lag that of men. This dual reality should be factored into retirement planning conversations and communications with women, particularly in light of our research showing that women have a gap when it comes to retirement savings. This savings difference is a result in part from women having more gaps from employment due to primary caregiver responsibilities, but it’s those responsibilities that lead in part to their better longevity knowledge.

One area of the study focuses on retirement readiness and longevity literacy, and perhaps unsurprisingly, finds that those who are more proficient in longevity knowledge are more future-focused and able to better plan for retirement. There is an interesting correlation that could appear between those who are most future-oriented and those with strong longevity knowledge. This is a potential audience segment that should appreciate the great benefit of securing lifetime income through annuitization.

The study shows that financial literacy, knowledge of longevity and retirement readiness are all linked. This should not be a surprising outcome for anyone with knowledge of the retirement industry. Laying out the stark data that highlights just how much work remains to be done in educating people at all stages of their careers on how long retirement savings might need to last, how to save properly throughout a career, and the interaction of savings, quality of life in retirement and overall readiness is a valuable study. With only a third of U.S. adults showing a strong knowledge of longevity, more work must be done to help participants prepare for the length of retirement that they face, and to be prepared when it does arrive.

How this ties into lifetime income

As we’ve written in prior editions of next, guiding participants toward an understanding of how to make sure that their retirement savings will last is a key goal for plan sponsors. We believe that one of the best ways to do this is through the inclusion of a guaranteed lifetime income product within a retirement plan that annuitizes retirement assets into a continuous income stream. Improving longevity literacy would likely increase annuitization rates as we would not expect the primary value of annuitization (a consistent stream of income for as long as you live) to resonate among those with poor knowledge about how long they could realistically live in retirement.

The study further examines financial outcomes in retirement. 83% of retirees with strong longevity literacy have lifestyles that meet or exceed pre-retirement expectations, compared with 63% of those with weak literacy.

Educating participants about life expectancy is key as it can help tie together the conversations of just how long retirement could last, and how to make sure that retirement assets are sufficient to last through that period. These studies can also help educate younger employees, for whom retirement is a distant prospect, that the balance of working life and retirement life is shifting ever longer toward more years in retirement, so savings need to be built early and often to allow for a steady deaccumulation phase.

Our research into providing lifetime income specifically identifies longevity risk as an area that can be mitigated by the inclusion of an annuity within retirement planning. We’d recommend building financial literacy programs, and looking to include guaranteed lifetime income within a plan to ensure that participants can make their savings last their retirement, no matter how long it is.⁴