A recent study by Dr. Abigail Hurwitz and Professor Orly Sade from Hebrew University, soon to be published in Management Science, illuminates how retirees navigate their savings across various accounts and the resultant effects on their retirement payout options. Entitled “Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts”, this research delves into the decision-making processes of individuals possessing more than one retirement savings account, specifically focusing on the choice between annuitization—securing oneself against longevity risk—and opting for a lump-sum withdrawal.
The study utilises exclusive data from a prominent Israeli insurance company and enhances its findings through a lab-based experiment and an online survey experiment. A pivotal observation made through the research is that smaller savings accounts are far more frequently withdrawn as lump sums than their larger counterparts. The study employs occupational roles as wealth indicators, uncovering that individuals with higher anticipated earnings are more inclined to annuitise their savings, albeit less so when dealing with smaller accounts. According to Dr. Hurwitz and Prof. Sade, this pattern reflects income levels and the strategy of diversifying savings across numerous accounts.
Dr. Abigail Hurwitz remarked on the significance of how multiple accounts are structured in influencing annuitization decisions, particularly distinguishing between smaller and larger accounts. She noted that these findings significantly affect retirees, especially their long-term financial stability.
The research methodology included administrative data alongside a series of experimental studies. An online survey and a laboratory experiment uncovered a tendency among retirees to avoid annuitizing smaller accounts, a behaviour influenced by mental accounting. Individuals treat funds differently based on their categorisation or allocation in this psychological principle. Further, a follow-up survey involving financial experts revealed that such professionals are less swayed by how funds are distributed across different accounts and tend to evaluate the total portfolio more holistically.
Prof. Orly Sade highlighted the implications of these insights for financial institutions, particularly those managing pension funds. She stressed that understanding the size distribution of accounts is critical for accurately predicting annuitization behaviour and assessing longevity risk, which are essential for asset and liability management strategies and directly influence the reserves necessary for annuity providers.
The findings of this study provide essential insights into how retirees manage their savings and make decisions about annuitization, underscoring substantial implications not only for financial institutions but also for policymakers in shaping future financial security strategies for the ageing population.
More information: Abigail Hurwitz et al, Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts, Management Science. DOI: 10.1287/mnsc.2022.02489
Journal information: Management Science Provided by The Hebrew University of Jerusalem