Annuitization: Keeping Your Options Open
- 1 March 2004
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
Annuities provide insurance against outliving one's wealth. Previous studies have indicated that, for many households, the value of the longevity insurance should outweigh the actuarial unfairness of prices in the voluntary annuity market. Nonetheless, voluntary annuitization rates are extremely low. Previous research on the value of annuitization has compared the alternative of an optimal decumulation of unannuitized wealth with the alternative of annuitizing all unannuitized wealth at age 65. We relax these assumptions, allowing households to annuitize any part of their unannuitized wealth at any age and to return to the annuity market as many times as they wish. Using numerical optimization techniques, and retaining the assumption made in previous research that half of the household wealth is pre-annuitized, we conclude that it is optimal for couples to delay annuitization until they are aged 74 to 89, and in some cases never to annuitize. It is usually optimal for single men and women to annuitize at substantially younger ages, around 65 and 70 respectively. Households that annuitize will generally wish to annuitize only part of their unannuitized wealth. Using data from the Asset and Health Dynamics Among the Oldest Old and Health and Retirement Study panels, we show that much of the failure of the average currently retired household to annuitize can be attributed to the exceptionally high proportion of the wealth of these cohorts that is pre-annuitized. We expect younger cohorts to have smaller proportions of pre-annuitized wealth and we project increasing demand for annuitization as successive cohorts age.Keywords
This publication has 20 references indexed in Scilit:
- Retirement and the Evolution of Pension StructurePublished by National Bureau of Economic Research ,2003
- Annuities and Individual WelfarePublished by National Bureau of Economic Research ,2003
- Individual Subjective Survival CurvesPublished by National Bureau of Economic Research ,2003
- Private pensions, mortality risk, and the decision to annuitizeJournal of Public Economics, 2001
- The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement ProgramPublished by University of Chicago Press ,2001
- Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory IssuesPublished by National Bureau of Economic Research ,2001
- Joint Life Annuities and Annuity Demand by Married CouplesJournal of Risk and Insurance, 2000
- Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity MarketPublished by National Bureau of Economic Research ,2000
- Differential Mortality and Wealth AccumulationThe Journal of Human Resources, 2000
- Pension and Social Security Wealth in the Health and Retirement StudyPublished by National Bureau of Economic Research ,1997