New study shows that retirees are more likely to cash out smaller retirement accounts instead of turning them into steady income streams, even though they might do the opposite with larger accounts. This choice can hurt their long-term financial security, leaving them with less stable income in retirement. For financial companies, this behavior has implications in their ability to manage assets liabilities risks (ALM).
A new study by Dr. Abigail Hurwitz and Prof. Orly Sade from Hebrew University, forthcoming in Management Science, sheds light on how retirees manage their savings across multiple accounts and its impact on their payout decisions at retirement. Titled Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts, the research explores how individuals with more than one retirement savings account choose between annuitization—insuring themselves against longevity risk—and cashing out their savings in a lump sum.
Drawing on proprietary data from a leading Israeli insurance company, accompanied by a laboratory experiment and an online experimental survey, the study highlights a critical trend: smaller accounts are much more likely to be cashed out than larger ones. The researchers use occupation as a proxy for wealth and find that individuals with higher expected wages are more likely to annuitize their savings but less likely to annuitize smaller accounts. This behavior, according to Hurwitz and Sade, is not merely about income but also the diversification of savings across multiple accounts.
“We discovered that the composition of multiple accounts influences annuitization decisions, especially for smaller versus larger accounts,” said Dr. Abigail Hurwitz. “This can have significant implications for retirees, particularly regarding their long-term financial security.”
The study uses both administrative data and a series of experiments to analyze this phenomenon. An online survey and a laboratory experiment revealed that retirees are less likely to annuitize small accounts due to mental accounting, a concept that leads individuals to treat money differently depending on how it is categorized or allocated. A supplementary survey conducted with financial experts indicated that these professionals were less influenced by the distribution of funds across accounts and were more inclined to consider the entire portfolio.
The study's findings are far-reaching, particularly for financial institutions managing pension funds. “Our results suggest that financial institutions should consider the size distribution of accounts when forecasting annuitization behavior and longevity risk,” said co-author Prof. Orly Sade. “It is vital for asset and liability management strategies, especially as these decisions directly impact the future reserves required for annuity providers.”
This research provides crucial insights into how retirees manage their savings and make annuitization decisions, highlighting significant implications for both financial institutions and policymakers.
The research paper titled “Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts” is now available at Management Science and can be accessed at https://pubsonline.informs.org/doi/10.1287/mnsc.2022.02489
https://doi.org/10.1287/mnsc.2022.02489
Funding
Funded by the Albertson-Waltuch Chair in Business Administration, the Kruger Center at the Hebrew University, the Think Forward Initiative, the German-Israeli Foundation for Scientific Research, and the Center for Agriculture, Environment and Natural Resources at the Hebrew University of Jerusalem.
Researchers:
Abigail Hurwitz1, Orly Sade2
Institution:
- Environmental Economics and Management, Institute of Environmental Sciences, Robert H. Smith Faculty of Agriculture, Food and Environment, The Hebrew University of Jerusalem
- Dean, Department of Finance, Albertson-Waltuch Chair in Business Administration Hebrew University Business School (HUBS), The Hebrew University
The Hebrew University of Jerusalem is Israel’s premier academic and research institution. With over 23,000 students from 90 countries, it is a hub for advancing scientific knowledge and holds a significant role in Israel’s civilian scientific research output, accounting for nearly 40% of it and has registered over 11,000 patents. The university’s faculty and alumni have earned eight Nobel Prizes, two Turing Awards a Fields Medal, underscoring their contributions to ground-breaking discoveries. In the global arena, the Hebrew University ranks 81st according to the Shanghai Ranking. To learn more about the university’s academic programs, research initiatives, and achievements, visit the official website at http://new.huji.ac.il/en
