Insight: LUMP SUMS VS. ANNUITIES: DIFFERENT EFFECTS ON SAVING INTENTIONS
By Emerson Sprick
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Research findings by Daniel Goldstein, Hal E. Hershfield, and Shlomo Benartzi suggest that pre-retirees are better able to imagine their projected wealth in retirement when those projections are presented as lifetime monthly income rather than as lump sums. Among pre-retirees with less than $1 million in projected retirement wealth, those who think of their retirement wealth as a monthly income are more likely to save at a higher rate than are pre-retirees who consider their wealth only as a lump sum. The reason for this difference is likely that pre-retirees can more easily compare projected monthly income to their current budget, especially with regard to expenses billed monthly, such as rent or mortgage payments, car payments, and utilities. As a result of these findings, the authors suggest that financial professionals and retirement plan providers should focus on monthly income projections more than on lump-sum projections when consulting with pre-retirees.
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About the Author
Emerson Sprick is a policy analyst at the Bipartisan Policy Center in Washington, DC. He earned a master’s degree in economics from Georgetown University and a bachelor’s degree from the University of Missouri.