A new study reveals that retirees are more likely to cash out smaller retirement accounts rather than convert them into steady income streams, contrasting with their behavior toward larger accounts. This tendency can jeopardize long-term financial security, resulting in less stable income during retirement. For financial companies, this behavior poses challenges in managing asset-liability risks (ALM).

 

Researchers Dr. Abigail Hurwitz and Prof. Orly Sade from Hebrew University have published a study in Management Science that examines how retirees manage their savings across multiple accounts and how these decisions impact their payout decisions at retirement. Titled Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts, the research investigates how individuals with multiple retirement savings accounts decide between annuitization—insuring against longevity risk—and cashing out their savings as a lump sum.

 

Using proprietary data from a leading Israeli insurance company, alongside a laboratory experiment and an online survey, the study reveals a key trend: retirees are much more likely to cash out smaller accounts than larger ones. The researchers found that individuals with higher expected wages are more inclined to annuitize their savings but tend to avoid annuitizing smaller accounts. According to Hurwitz and Sade, this behavior reflects not just income levels but also how savings are diversified across different accounts.

 

Impact on Financial Security

Dr. Abigail Hurwitz explains, “We discovered that the composition of multiple accounts influences annuitization decisions, especially for smaller versus larger accounts. This can have significant implications for retirees, particularly regarding their long-term financial security.”

 

The study employs both administrative data and various experiments to analyze this phenomenon. The online survey and laboratory experiment indicated that retirees often choose not to annuitize small accounts due to a concept known as mental accounting, where individuals treat money differently based on its categorization. A supplementary survey of financial experts showed that these professionals tend to consider the entire portfolio rather than being influenced by the distribution of funds across accounts. 

 

Institutional Implications

The findings have important implications for financial institutions managing pension funds. Prof. Orly Sade notes, “Our results suggest that financial institutions should consider the size distribution of accounts when forecasting annuitization behavior and longevity risk. This is vital for asset and liability management strategies, as these decisions directly impact the future reserves required for annuity providers.”

 

This research sheds light on how retirees manage their savings and make annuitization choices, highlighting significant implications for both financial institutions and policymakers.

 

The research paper titled Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts is now available at Management Science and can be accessed here. 

 

Funding

This study was funded by the Albertson-Waltuch Chair in Business Administration, the Kruger Center at the Hebrew University, the Think Forward Initiative, the German-Israeli Foundation for Scientific Research, and the Center for Agriculture, Environment and Natural Resources at the Hebrew University of Jerusalem.

 

Researchers:

Abigail Hurwitz¹, Orly Sade²

 

Institution:

1. Environmental Economics and Management, Institute of Environmental Sciences, Robert H. Smith Faculty of Agriculture, Food and Environment, The Hebrew University of Jerusalem
2. Dean, Department of Finance, Albertson-Waltuch Chair in Business Administration Hebrew University Business School (HUBS), The Hebrew University

 

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