Given the widespread transition from defined benefit (DB) to defined contribution (DC) retirement plans, Americans increasingly face the challenge of assessing whether their saving behavior is likely to provide a secure retirement. Appropriate saving choices in one’s working years requires understanding how current saving choices translate into income in retirement, which requires a high level of financial sophistication.
Annuities are not popular despite providing valuable insurance against outliving one’s savings. The resistance to annuities is called the “annuitization puzzle.” We conducted and analyzed two large surveys asking Americans to make hypothetical annuitization choices in order to explore some of the factors that influence consumer attitudes toward annuitization, focusing on product design and how choices are presented (i.e., “framed”). We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to making an all-or-nothing annuitization decision.
A growing literature shows how consumers make mistakes in a variety of different settings pertinent to financial decision-making. Using data from a randomized experiment in Chile, we show how different ways of presenting pension management fees shape consumer choices, and how responses to pension fee information varies by level of financial literacy. Our results indicate that, in choosing pension funds, those with lower levels of education, income, and financial literacy rely more on employers, friends, and coworkers, than on fundamentals.
Advisors need to understand the way investors think about decisions and the process through which decisions are made. Evidence from experimental research in behavioral finance indicates that investors often have limited computational ability and/or limited attention implying that investors will have difficulty making optimal choices when information requires complex processing, such as aggregating risks across investments or time.
Despite agreement among experts that many consumers should place a high value on life annuities and related products that insure against longevity risk, few consumers voluntarily annuitize their retirement savings. This brief summarizes evidence that consumers’ aversion to annuities is not a fully rational phenomenon. Research finds that framing, i.e., how financial products are presented to consumers, can significantly affect respondents’ preferences among competing products.
This paper examines the two sets of factors controlled by a worker and affecting a person’s Social Security benefit. The first set of factors affect a worker’s base benefit, known as the Primary Insurance Amount (PIA), and include years of coverage in the Social Security system and an individual’s history of taxable earnings under the Social Security system. The second set of factors pertain to changes in the primary insurance amount, including early retirement reductions, delayed retirement credits, the earnings test, and the tax on benefits.
This paper examines two studies of investment risk taking among higher education employees in their institution-sponsored retirement savings plans. Risk taking is a complex psychological and behavioral process. The first study examined direct correlates of risk taking. The second study modeled the mediated effects of dispositions, opportunity perception, experience, inertia, and demographics, and the direct effects of an attitudinal risk preference and knowledge of investment principles on risk taking in retirement savings.
This two phase study examined how to motivate women to save for retirement. The quantitative first phase validated findings regarding the existence of distinct personality types among women regarding retirement saving. In the second phase, focus groups were conducted with the five retirement personality types to identify messages that might motivate them to invest for retirement. Focus groups revealed more similarities than differences across personality types; there may actually be greater differences between married and single women.
This paper examines how supplemental retirement savings decisions of higher education faculty are influenced by the generosity and structure of an individual’s primary retirement plan. Standard economic models of saving predict than an extra dollar contributed to an employee’s primary defined contribution account will reduced the supplemental savings of that employee by one dollar, regardless of the source (employer or employee) of the pension contribution. A behavioral perspective suggests that people may treat them differently, however.