Minding the Gap in Subjective Mortality Estimates

Abstract

This article explores the accuracy of subjective life expectancy estimates using data primarily from the from the Health and Retirement Study (HRS). Although individuals appear to have some sense about their likelihood of survival (i.e., their subjective mortality), there are notable gaps in these estimates, consistent with past research. Evidence suggests that although subjective estimates may be relatively accurate, on average, and that households appear to do a relatively good job considering various objective factors (for example, health status), there are often significant errors in individual forecasts, and households do not appear to correctly consider all the relevant objective factors (such as income and smoking). Therefore, financial planners need to educate themselves on how to better model and personalize mortality assumptions into financial plans versus relying on purely subjective estimates to ensure that planning assumptions are as accurate as possible. Key Findings ▪ Errors in mortality forecasts can have a significant impact on a variety of household decisions, such as required savings, optimal retirement spending, etc. ▪ This analysis suggests that while individuals appear to have some sense of their mortality, there can be notable errors in these estimates and that a number of attributes are not appropriately considered when forecasting mortality. ▪ Given the clear gaps that exist in subjective mortality estimates, objective information should largely (or entirely) be the basis for any type of retirement period estimate in a financial plan.