Mortality salience: why retirees tend to choose lump sums

[Big_Hitter]

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"

 

[harley]

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.

 

[Bruceski44]

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.

 

[Big_Hitter]

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

 

[Big_Hitter]

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

 

[W2R]

"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.

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

 

[Big_Hitter]

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?

 

[W2R]

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.

 

[2017ish]

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...015_Annuity_Puzzle_and_Mortality_Salience.pdf

__________

edited to add bracketed material....

 

[Tandemlovers]

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.

 

[HadEnuff]

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?

 

[Big_Hitter]

"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

 

[W2R]

"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.

 

[dunkelblau]

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.

 

[ExFlyBoy5]

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?

 

[bclover]

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.

 

[Sunset]

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.

I thought you had a bike

 

[pb4uski]

"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.

 

[W2R]

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.

 

[bclover]

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.

 

[imoldernu]

Count me among the iggorent...
It was back in the '80's when mom passed away, and the lawyer suggested the $8000 bequest be put into an annuity. We never paid much attantion until several years ago, when the statement read well into the mid 50K's..., but with a surrender value of under $45K...
We let it lie, until two years ago when I decided to check into the terms, to see what the annual payout would be. I was quoted a 5 year payout, which seemed ok, except a call back said it would be over a 10 year period. That made the annual amount would be so small as not to be noticed, and besides... at age 80, more trouble than it's worth.
And so.... I suppose we left something on the table, but the amount is so small, that it wouldn't matter much, anyway.

Never claimed to be financially bright.

BTW... the first two years interest on the annuity was 12%, after which it rather quickly dropped to a minimum of 4% which it still pays today.

 

[UpAnchor]

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.

Makes sense to me. Although, regarding their mortality driven nature, I find it interesting how much the payouts in recent years have seemingly been influenced by the low interest rate environment. Perhaps projected longer life spans has played into that as well.

 

[W2R]

I didn't think either, that's why I asked the question because I didn't understand your post, still don't.

OK, I'll go through it bit by bit and explain, then.

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.

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

Seriously?

Hopefully the emphases I added to my own post above (and to Big Hitter's post) will clarify the meaning of my post, which I thought was written in English but which apparently was impossible to understand. These things happen and I apologize if my post was incomprehensible.

Such retirees might be doing things most (not all) of us might (not would) consider to be completely crazy - - LIKE (not 100% always) gambling.

Other possible examples of things those of low financial acumen might make that most (not all) of us might (not would) consider to be completely crazy would be things like, oh, say, making poor investment decisions, or other personal finance decisions that turned out to be disastrous, despite the best of intentions.

Of course, other retirees who are not of low financial acumen might also make decisions that did not work out due to sheer rotten luck, evil ex-spouse, or whatever reasons, and they might also end up living on nothing but SS.

Better?

 

[Walt34]

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?

We had a similar situation where I worked. The retirement system when I was hired was a DB COLA'd, 50% of the last year's pay at 25 years service or 2% per year after 20 years. (I actually got a much better deal but that's another long story.) When I had about ten years on they changed the retirement system to a less-beneficial plan (I forget the details) but the COLA was capped at 3% where it was 100% of the DC area COL and the COLA raises were a lower percentage of the DC area COL. The hook was that if you switched to the new plan you could get a tax-free check for one-half of your previous retirement contributions since you'd already paid the taxes on it. A lot of guys took the bait, and as I predicted at the time, they were regretting it later. The same thing happened: they bought cars, boats, motorcycles, larger homes, and the like.

Me, I just plodded along, stayed in the old plan and paid a higher percentage into the retirement system, and didn't have to work a second job until SS after I retired.

 

[UpAnchor]

We had a similar situation where I worked. The retirement system when I was hired was a DB COLA'd, 50% of the last year's pay at 25 years service or 2% per year after 20 years. (I actually got a much better deal but that's another long story.) When I had about ten years on they changed the retirement system to a less-beneficial plan (I forget the details) but the COLA was capped at 3% where it was 100% of the DC area COL and the COLA raises were a lower percentage of the DC area COL. The hook was that if you switched to the new plan you could get a tax-free check for one-half of your previous retirement contributions since you'd already paid the taxes on it.

These situations remind me of a recent thread or two regarding legacy whole life policies. If you are being encouraged or even just "offered the opportunity" to switch to a different plan, there's usually a reason. And it's not to place money in your wallet...