Behavioral Insights About Retirement Income Decisions

Say the word “annuity” and many people turn up their noses, yet are anxious to take their Social Security benefits as soon as they can. What can help more people embrace something that guarantees lifetime income and delay taking Social Security so they can have greater income in retirement?

How to communicate trade-offs is one answer, according to Suzanne Shu, associate professor of marketing at the UCLA Anderson School of Management.

Shu told attendees of the Plan Sponsor Council of America’s (PSCA) 2019 Annual Conference that although single-life annuities remove the risk of people  outliving their savings, those who don’t favor annuities are risk-averse. The risk they fear is dying before they get paid all their benefits. But, Shu said these folks are thinking of the way variable annuities work, not fixed annuities.

Shu discussed a research study, in which she was involved, that offered subjects a choice of three annuity options for which they could invest $100,000 at age 65. Recognizing individuals’ fear of dying before obtaining all annuity payments, all options were period-certain annuities. For example, the first had monthly payments starting at $400 and a 7% annual increase in payments for 30-years period certain—meaning if the annuitant died before 30 years, the remaining payment would go to a beneficiary. Of the three options, one used a $400 increase in payments rather than a percentage.

One thing Shu noted was with just basic information about the choices, more than one-third (36%) chose “if these were my only options, I would defer my choice and continue to self-manage my retirement assets.” Also, two in 10 chose an option with a set dollar amount annual increase in payments, and the biggest share of subjects chose an annuity option with the least period certain years and a 5% annual increase in payments rather than a 7% annual increase.

When study participants were given enhanced information—such as how much total the annuity will pay out over time and a table of payment amounts at different ages—to show the compounding of the percentage annual increase, more people chose annuities and many who first chose a dollar amount annual increase moved to the 5% annual increase. Still, nearly one-quarter (24%) chose no annuity.

Shu also told conference attendees that the majority of people declare Social Security at age 62—the earliest age at which they can take it. Claiming falls after that age with a slight spike at around age 66, the current Social Security retirement age, but few delay taking it until age 70 or later. “Many think, ‘That’s my money the government is sitting on; I want it back,’” she said. The strong sense of ownership is one reason people are so eager to claim Social Security early.

Another reason is the same risk aversion as with annuities, according to Shu. People don’t want to pass away before they get all their money, but they don’t consider how long they will live. In a study, people were first asked a series of questions about their chances of dying by certain ages. Later, the very same people were asked about their chances of living to certain ages. “There was a 10-year gap in the median expected age of death; people have a much higher life expectancy when they are asked about the chance they will ‘live-to’ a certain age,” Shu said.

Shu’s research has found that convincing people to claim Social Security at a later age is difficult with messaging, but there are some measures that have worked. For example, communicating to people that delaying the age they declare is a good idea for their financial well-being, telling people to consider the implications of living longer in retirement and letting them know about how many people regret claiming early all had significant impacts on individuals’ claiming age decisions.

Shu said helping individuals with decumulation decisions is harder than with accumulation decisions. Individual differences matter, from goals for retirement, to health condition and life expectancy. There is no one-size-fits-all decumulation product or plan, and communications about decumulation should not be either.