Making Retirement Decisions Together Affects Preferences

When given information about how making retirement decisions in aggregate instead of alone affects outcomes, retirees changed their preferences.

Retirees often make decisions about claiming Social Security benefits, starting pension benefits or 401(k) withdrawals, purchasing annuities, buying long-term care insurance and/or tapping home equity separately from one another. This is known as narrow framing. Narrow framing can occur when people look at each individual decision without considering the context of the overall financial picture.

As part of an experiment, researchers created a decision tool that helps people look at their retirement income in an aggregate manner.

In the first experiment, participants were instructed to use an online tool to make three major retirement decisions about Social Security benefits, 401(k) withdrawals and annuity purchases. Participants were split into two comparison groups that were either shown the aggregated outcome of retirement income decisions from all sources or each separate source individually. For example, when those in the separate condition picked the retirement savings product, they were shown a wealth graph over time, while participants in the aggregate condition were shown a wealth graph for all three of the retirement income sources.

In the initial experiment, researchers found that retirees who made decisions in consideration of one another—as opposed to separately—have smoother retirement income, rather than more volatile, claim Social Security benefits earlier and show less interest in annuities.

The second follow-up experiment consisted of a different set of participants using the same tool. For this experiment, the researchers “sought to better understand how well the decisions and outcomes that participants selected in the tool reflected their individual preferences.” Participants were shown how wealth was impacted by each choice overtime. Participants showed less preference toward smoother retirement income but were willing to take on more risk.

Researchers found that “decisions can be affected by aggregating outcomes, that individuals report higher satisfaction with their decisions when made in an aggregated environment, but that they also indicate that the outcomes they have chosen are less desirable in hindsight than other possible retirement income paths.” Note that the tool is hypothetical but shows how considering the impact of all decisions can alter preferences relative to making each decision separate from one another.

Source: “Broad Framing in Retirement Income Decision Making,” by Hal Hershfield, Suzanne Shu, Stephen Spiller and David Zimmerman; NBER, September 2020.