Failing to think about living into our 80s and 90s can have significant negative financial implications. The average life expectancy for a man aged 65 is 20 years, and for a woman, 23 years. 1 in 4 men aged 65 are expected to live until age 92 and 1 in 4 women will live until 94. Underestimating the amount of time we might live can be damaging, with the risk of overspending in the early years of retirement, leaving too little resources for later life.

Our thinking about these types of things – where we may not have the knowledge we need – is influenced by our mental shortcuts which result in these biases.

There are a few examples of the shortcuts we all take, and which can easily mislead us:

• 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 unremarkable fact of people continuing to live well into their 80s and 90s. This encourages people to overestimate the likelihood of dying young.
• Optimism Bias and Pessimism Bias. Glass half full or half empty? These biases are our tendencies to believe that either positive or negative outcomes are more likely for ourselves than for others. Pessimism bias can foster a bleak view of one’s health and longevity, causing us to over-emphasize personal experiences and family health histories that suggest the possibility of shorter lifespans. Optimism bias is the opposite but, in the context of life expectancy, can cause us to be over-cautious with our spending as we believe our money will be needed for longer.
• 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 withdrawing funds from your pension now seem more attractive than the delayed, but larger, benefits of withdrawing in ten years, for example, 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. Many people have been disappointed to learn that their state retirement age has been delayed – they were expecting to retire at 60 or 65, only to find that their state pension was being delayed until 67. The anchoring effect is partly responsible for this – it is difficult to “pull up the anchor” and adjust plans based on new information, even if the reason for the delay in state retirement age is the result of an increase in general life expectancy.
• 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 63 as the ideal retirement age will resist altering their retirement plans even if they learn that delaying would be in their financial best interest.

Being aware of these shortcuts and errors can help us to get things right, particularly when the information we need is available to us. We can help you to work with the known facts and figures to help you to take a rational approach to your retirement spending.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

The value of pensions and any income from them call fall as well as rise. You may not get back the full amount invested.