More than half of the people over age 45 underestimate how long they will live, which can have major consequences for retirement planning, according to a survey by the Society of Actuaries.
At the same time, a majority says they would make major changes in their savings and lifestyles if they thought they would live five years longer than expected, according to the survey, Understanding and Managing the Risks of Retirement.

More than half (54%) of retirees think they will not live as long as the average person of their age and gender, while 31% think they will live longer than the average. For pre-retirees, 46% think they will live fewer years than the average while 41% feel they will longer. They survey included 800 retirees and 800 pre-retirees.

However, many people forget that the population average represents a middle ground and half of the population will live longer than the average, the survey notes. Life expectancy for a newborn American male improved from 66.6 years in 1960 to 75.7 years in 2010, and for females newborns, from 73.1 in 1960 to 80.8 in 2010.

At majority of retirees (64%) and pre-retirees (73%) say they would be very or somewhat likely to make significant reductions in their living expenses if they thought they would live five years longer than they expected. More than half of pre-retirees would also use money they otherwise would have left to heirs (58%) or downsize their housing (55%).

"Reducing expenditures is often cited as a risk management strategy," says the survey. "The challenge surrounding this strategy is that many retirees have already reduced expenditures. Planning to use home equity to finance retirement is precarious as a strategy, especially in times of reduced housing prices and considering the illiquid nature of real estate."

Many people also have too short of a planning horizon when making major financial decisions, the survey indicates. The median number of years for retirees' look into the future is five years, according to the survey, and for pre-retirees the median is 10 years.

"Underestimation of life expectancy, together with having too short a planning horizon, can result in inadequate provision for retirement needs," the report concludes.

"For those individuals who are attempting to manage assets to last the rest of their lives through a systematic withdrawal strategy, underestimation of life expectancy increases the chance that they will exhaust all resources other than Social Security," the Society of Actuaries says.

"Underestimating life expectancy may discourage using life annuities," the society says. "While purchasing life annuities is not an absolute guarantee, it is one strategy to reduce the risk of outliving financial resources."

The state of the economy and the volatility of the stock market has left 66% of pre-retirees and 53% of retirees feeling they need to do a better job of managing their finances and planning for retirement. It has also resulted in 74% of pre-retirees feeling they need to save more money and 67% thinking they may have to work longer than expected.

The Society of Actuaries predicts more people will turn to financial advisors for assistance as more rely entirely on defined contribution plans for their retirement. Now only 17% of pre-retirees and 21% of retirees in this survey regularly consult an advisor. Of the survey respondents, only one in eight has savings and investments of $500,000 or more.

The major concerns of those surveyed remained the same since the first survey was taken in 2001, but each has increased in intensity. Retirees who reported being very or somewhat concerned about inflation jumped from 55% in 2001 to 69% last year, while those worried about health-care costs went from 43% to 61% and worry about long-term-care risks went from 48% in 2003 to 60% last year (the question was not asked in 2001).

Similarly for pre-retirees, those worried about inflation went from 63% to 77%; those concerned about health-care costs went from 58% to 74%, and those worried about long-term care risks went from 66% in 2003 to 66%.

"Increased recognition of the impact that inflation can have on retirement spending is important," the society says, since "inflation impacts those who live a long time more severely than those who die earlier."

-Karen DeMasters