For retirees, behavioral science is coming up short

While behavioral finance has helped get workers to save more for retirement, it’s been less successful in forcing retirees to accept that they may outlive their savings.
For example, behavioral finance has helped the retirement industry use consumers’ behavior to boost assets saved during the accumulation phase of retirement planning, through both automatic enrollment in 401(k) plans and automatic escalation of savings in such plans, Daniel Goldstein, a professor at London School of Business, said during a panel discussion held today by Allianz of America, a unit of Allianz Group, to discuss ways in which the retirement industry can use behavioral finance to inform retirement planning and product marketing.
It appears that when it comes to the decumulation phase of retirement, or the “post-retirement” phase, behavioral finance hasn’t yet been well-deployed to help retirees understand that they may very well outlive their retirement savings, and that a product like an annuity may help provide guaranteed income.
That’s because annuities haven’t been positioned correctly by taking into consideration retirees’ “hyper-sensitivity” to investments losses as well as the way older people often can’t make financial decisions as well as when they are younger.
“I could not imagine a harder product to sell from a behavioral finance standpoint than an annuity,” said Eric Johnson, a professor at Columbia University who has done work on the “hyper-loss aversion” of retirees, as well as the perceived loss of control from annuities that often makes them less attractive.
Positioning annuities as monthly income, along the lines of defined benefit plans, can help make annuities more attractive, suggested Dr. Alessandro Previtero of the University of California, Los Angeles.