Data & Research January 28, 2009

Longevity Risk Makes for More Frugal Elderly

One potential reason why some elderly run down their assets slowly is uncertainty over their life spans, suggests an analysis by the National Bureau of Economic Research (NBER).

Reported by

Rebecca Moore

The researchers conducted an analysis of single people in the Assets and Health Dynamics of the Oldest Old (AHEAD) dataset and found that an unhealthy 70-year-old male at the 20th percentile of the permanent income distribution expects to live only six more years while a healthy 70-year-old woman at the 80th percentile of the permanent income distribution expects to live 16 more years. “Such significant differences in life expectancy could, all else equal, lead to significant differences in saving behavior,” the paper says.

The researchers point out that while the average lifespan of unhealthy males at the 20th percentile of the permanent income distribution is six years, 8% of these individuals will live for at least 15 years, showing that the risk of outliving one’s assets in retirement is large.

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The analysis found that permanent income, health, and gender have similar effects on life expectancy. Individuals with high net worth, good health, and who are female have realistic expectations of their mortality and tend to spend down their savings more slowly (see “Women Could Face More Savings Shortfalls Than Men“). However, those who feel they will not live longer than their life expectancy—an unrealistic view of longevity risk—deplete their assets sooner.

The paper can be purchased here.