Financial & Health Wellness An Actuary’s View Thomas L. Totten, FSA, PhD April 13, 2018

Background An Actuary’s Story Behavioral Biases Healthcare and the decision to retire Current Actuarial Survey Info Conclusion

Background Recruit Retain Retire

Background Financial Wellness is not new All benefits improve financial wellness Retirement Health care Disability Life Insurance Some sort of integration of all benefits plus other features of wellness on one platform

Background Retirement readiness is somewhat misleading when: People have different goals People have different health statuses If your lifespan is projected to be short, then you spend fast People have different expense structures People are sometimes supporting different generations Financial wellness must be more personalized

An Actuary’s Story

Behavioral Biases Behavioral finance must be understood People make irrational decisions Financial wellness involves understanding

Behavioral Biases Which option would you choose? You have a guaranteed $800 win You have a 20% chance to win $1,000 and 80% chance to win $0

Behavioral Biases Which option would you choose? You have a guaranteed $800 loss You have a 20% chance to lose $0 and 80% chance to lose $1,000

Behavioral Biases Prospect theory by Kahneman and Tversky showed that people value losses and gains differently Nobel prize They also showed that people overestimate low probability events and underestimate high probability events Thus lottery tickets are born

Behavioral Biases What is your choice? Lump sum or annuity at retirement if you have a pension: You can take $50,000 a year when you retire at age 65 for the rest of your life. You can take $600,000 in one lump sum. What is your choice?

Behavioral Biases Nyhart data shows that 80% of people take lump sums Probably because of the view that it is a loss if they purchase the annuity and get hit by a bus the next day

Behavioral Biases Oddly enough, the reality shows that people who annuitize in retirement are happier Irrational decision then by pre-retirees? WILLIS TOWERS WATSON - SEPTEMBER 2012 Annuities and Retirement Happiness

Behavioral Biases Would you change your choice of annuities if you knew the probabilities? Do you overstate your probability of death when you don’t choose an annuity?

Behavioral biases THE ENDOWMENT EFFECT Pre-retirees view their pots of retirement money differently than retirees Suddenly, spending becomes even more of a problem with no new dollars coming in as a retiree Story of attorney JOURNAL OF POLITICAL ECONOMY - 1990 Experimental tests of the endowment effect and the Coase theorem

Behavioral Biases

Behavioral Biases

Healthcare and the decision to retire

Healthcare and the decision to retire

Healthcare and the decision to retire

Healthcare and the decision to retire How do you address healthcare for people planning to retire? Decisions on ACA, COBRA, Medicare, etc…… It is a huge part of financial wellness

Current survey info Society of Actuaries 2017

Current survey info Society of Actuaries 2017

Current survey info Society of Actuaries 2017

Current survey info Society of Actuaries 2017

Conclusion Benefits are a huge portion of financial wellness Even retirement experts struggle with retirement wellness Consolidating all information together is probably a good idea Understanding behavioral biases could help people in their financial decision making Health care becomes a big portion of wellness at the latter stage of a person’s career People are less confident in their ability to handle this postretirement