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Mortality salience: why retirees tend to choose lump sums
Old 07-06-2016, 07:49 AM   #1
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Mortality salience: why retirees tend to choose lump sums

Came across this yesterday when I was writing something for w*rk.

I think this is the first time that an attempt has been made to study the psychology behind the annuity versus lump sum decision. People are afraid to think of their own deaths so they default to a lump sum. Super interesting. I guess people need more retirement counseling to overcome this anxiety.

Solving the Annuity Puzzle: The Role of Mortality Salience in Retirement Savings Decumulation Decisions - Forthcoming Articles - Elsevier

"We propose mortality salience - increased accessibility of death-related thoughts - as one previously unexplored explanation for the annuity puzzle, the low rate at which retirees buy annuities even though economists recommend annuities as an optimal decision"
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Old 07-06-2016, 08:31 AM   #2
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I read the article, although not the study, and it didn't sound like they proved anything. They proposed a lot, but focused solely on their "mortality salience" theory, pretty much disregarding other options like control of your finances, desire to leave an inheritance, distrust of the pension/annuity company stability, etc. When I was considering whether to take the lump sum vs. a pension, thoughts of my mortality are a major portion of what drove me away from the pension. There was no avoidance of thoughts of mortality, it was just one of the factors involved in making the decision. Sounds like pseudoscience, or maybe a post-grad thesis to me.
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Old 07-06-2016, 08:38 AM   #3
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If this is what they are trying to explain: "...annuity puzzle, the low rate at which retirees buy annuities even though economists recommend annuities as an optimal decision"

I have a simple answer: The annuities aren't truly guaranteed and I can get a better rate with similar security on my own.
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Old 07-06-2016, 08:47 AM   #4
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Originally Posted by Bruceski44 View Post
If this is what they are trying to explain: "...annuity puzzle, the low rate at which retirees buy annuities even though economists recommend annuities as an optimal decision"

I have a simple answer: The annuities aren't truly guaranteed and I can get a better rate with similar security on my own.
not if your outlive it - that's the whole point
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Old 07-06-2016, 08:48 AM   #5
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I read the article, although not the study, and it didn't sound like they proved anything. They proposed a lot, but focused solely on their "mortality salience" theory, pretty much disregarding other options like control of your finances, desire to leave an inheritance, distrust of the pension/annuity company stability, etc. When I was considering whether to take the lump sum vs. a pension, thoughts of my mortality are a major portion of what drove me away from the pension. There was no avoidance of thoughts of mortality, it was just one of the factors involved in making the decision. Sounds like pseudoscience, or maybe a post-grad thesis to me.
I briefly read the study - it's very rigorous - they took over 700 observations from actual plan participants

Bottom line - it's a HUGE deal for most retirees, maybe not most on this forum but most retirees in general

I think the "anxieties" can be broken down into the three L's - lifestyle, longevity and liquidity - problem is, most DC (and to an extent defined benefit) plans don't offer payout options that can alleviate those anxieties:

Lifestyle - fixed annuity that covers basic expenses.
Longevity - QLAC or similar
Liquidity - hunk of cash left in the DC plan to leave to progeny or cover catastrophic expenses

anyway, this is the very first article I've ever read (and I've read tomes) that addresses the psychology behind annuity versus lump sum. all others just focus on the financial side and most are blog posts written by armchair actuaries

taking a lifetime annuity benefit in a single lump sum is a huge coin flip - you have a 50% chance to outlive it - also, taking lump sum distributions is known to cause poverty among the elderly but that's another scholarly article/discussion

so you get guaranteed income for life or....a coin flip that gives you a mansion and prime rib every night or a tent by the river with cat food every night

so how do we fix this? different plan designs and pre-retirement counseling, IMO
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Old 07-06-2016, 08:58 AM   #6
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Originally Posted by Big_Hitter View Post
"We propose mortality salience - increased accessibility of death-related thoughts - as one previously unexplored explanation for the annuity puzzle, the low rate at which retirees buy annuities even though economists recommend annuities as an optimal decision"
Interesting hypothesis.

Still, for many of us mortality salience is such a minor influence on this decision as to be nearly negligible.

If inflation protected annuities had higher rates, as they did years ago, I might be the first in line to buy one. My original retirement plan included 25% of my income arising from inflation protected lifetime annuities. But in today's financial climate, it just isn't worth it to me to buy an annuity. I'll look at them again in another decade or two.
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I have a simple answer: The annuities aren't truly guaranteed and I can get a better rate with similar security on my own.
+1
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Old 07-06-2016, 09:00 AM   #7
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Still, for many of us mortality salience is such a minor influence on this decision as to be nearly negligible.
totally agree with (most of) those on this forum - but what about the other 90% that don't have the same financial acumen?
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Old 07-06-2016, 09:05 AM   #8
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totally agree with (most of) those on this forum - but what about the other 90% that don't have the same financial acumen?
I guess I should care about them. I suspect that many such retirees are doing things most of us might consider to be completely crazy - - like busily gambling away their entire retirement savings in Las Vegas - - and are among those that end up with no income beyond SS.
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Old 07-06-2016, 09:16 AM   #9
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Love the dual abstracts. "Scientific Abstract" and "Layperson/Media friendly abstract."

I was unable to find the [actual journal] article at Big_Hitter's Elsevier link. Here is a link to a free pdf copy on Boston College's server: https://www2.bc.edu/linda-salisbury/...y_Salience.pdf

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edited to add bracketed material....
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Old 07-06-2016, 09:25 AM   #10
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We opted for the annuity over a lump sum for a number of reasons:

The lump sum was a modest amount, and by using the Immediate Annuities website, we could see that the monthly payout amount that the company offered was better than what could be purchased on the open market.

The pension payment amount is low enough to be protected under the Pension Benefit Guarantee Corporation, should the pension fail in the future.

The lump sum break even amount, not adjusted for inflation, was 16 years. We have a good likely hood of living at least that long, especially since we are separated in age by nine years.

We liked the idea of having three legs of the retirement stool in place: a pension, ss, and retirement savings.

The only downside to taking the annuity was that the monthly amount is not adjusted for inflation.
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Old 07-06-2016, 09:44 AM   #11
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Originally Posted by Bruceski44 View Post
If this is what they are trying to explain: "...annuity puzzle, the low rate at which retirees buy annuities even though economists recommend annuities as an optimal decision"

I have a simple answer: The annuities aren't truly guaranteed and I can get a better rate with similar security on my own.
"economists recommend annuities as an optimal decision"- Isn't that a nice little throw-away plum?
Really? They do? Which "economists"? The ones employed by annuity providers?
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Old 07-06-2016, 09:45 AM   #12
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"economists recommend annuities as an optimal decision"- Isn't that a nice little throw-away plum?
Really? They do? Which "economists"? The ones employed by annuity providers?
no, pretty much all of them actually

the citation is in the pdf of the study
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Old 07-06-2016, 09:47 AM   #13
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"economists recommend annuities as an optimal decision"- Isn't that a nice little throw-away plum?
Really? They do? Which "economists"? The ones employed by annuity providers?
+1 Sounds like it to me.
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Old 07-06-2016, 10:19 AM   #14
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I wonder whether any of the prior research connected this choice to Marshmallow Test results?

The attraction of the lump sum may be that it better fits what most of us project to be our spending trajectory, namely that we want to spend more in the early years while we're still healthy. And maybe the prompting about thoughts of death that swayed the study participants away from annuities might not be so much from fear and anxiety but rather that it amplifies our perception of the likelihood of an early demise. This would make nudging away from longevity insurance perfectly rational.

So maybe one way to push in the opposite direction would be for the annuity providers to splash out media coverage on centenarians and people 90+ who are still active-- and maybe even working full time? I'm sure they exist in rapidly rising numbers but I think our youth-obsessed culture makes such individuals invisible. News about the latest advances on medical treatments that enhance longevity may be effective as well.
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Old 07-06-2016, 10:36 AM   #15
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This reminds me a little bit of how the military retirement system was "tweaked" a few years ago. Basically, under the older system, you were eligible for 50% of your base pay at 20 years of service (and is COLA protected). Now, the gov't figured out that if they offered a lump-sum at the 15 year point (and agree to serve to 20) of $30,000 (and effectively reducing the pension to 40% and a -1% COLA reduction) that they could save a LOT of money. For the service member, the results were terrible. First, you had to pay the taxes on the $30,000 (unless you were in a tax free zone, but that was no guarantee) and then the net reduction over the years was WAY, WAY, WAY more than the 30,000. Anyway...the enlisted folks were all over this. I spent a few years as an "additional duty 1st Sgt" where I had to counsel these folks on the decision. As hard as I tried to disuade them from taking the lump sum, almost ALL of them took it...and of course, went out and bought a new car. It was sad to see, because I knew that when they realized how much it would affect their bottom line when they finally got that 1st pension check they would be full of regret. Oh well...what are you going to do?
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Old 07-06-2016, 12:02 PM   #16
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I guess I should care about them. I suspect that many such retirees are doing things most of us might consider to be completely crazy - - like busily gambling away their entire retirement savings in Las Vegas - - and are among those that end up with no income beyond SS.

You really think people living off of ss are doing so because they gambled away their retirement??

Seriously?

anyhoo, I took my late husbands pension as a lump sum payout mainly because the annuity could not be inherited, so if I step off the curb the first day after starting payments my kids would get nothing.

taking the lump sum gave me control over the money.
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Old 07-06-2016, 01:10 PM   #17
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You really think people living off of ss are doing so because they gambled away their retirement??

Seriously?

anyhoo, I took my late husbands pension as a lump sum payout mainly because the annuity could not be inherited, so if I step off the curb the first day after starting payments my kids would get nothing.

taking the lump sum gave me control over the money.
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Old 07-06-2016, 01:50 PM   #18
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"economists recommend annuities as an optimal decision"- Isn't that a nice little throw-away plum?
Really? They do? Which "economists"? The ones employed by annuity providers?
I thought the same thing... I don't see economists as having any special expertise to judge whether lump sum or annuity is the optimal decision compared to other financial professionals.

Since annuities are largely mortality driven.... what actuaries do when they have a lump sum/annuity decision would have greater weight with me than what economists recommend or do.
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Old 07-06-2016, 01:55 PM   #19
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You really think people living off of ss are doing so because they gambled away their retirement??

Seriously?
No, if I thought that then I would have said so. Please read my post carefully and try to discern exactly what I said.

Contrary to popular belief, I am neither a jack-booted Nazi thug, nor a heartless person who has never known someone who lived off of SS alone.
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Old 07-06-2016, 02:00 PM   #20
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No, if I thought that then I would have said so. Please read my post carefully and try to discern exactly what I said.

Contrary to popular belief, I am neither a jack-booted Nazi thug, nor a heartless person who has never known someone who lived off of SS alone.
I didn't think either, that's why I asked the question because I didn't understand your post, still don't.

No harm, no foul. Just asking a question, I'll go play elsewhere.
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