Health cost risk: A potential solution to the annuity puzzle

J.M.J. Peijnenburg, Theo Nijman, Bas Werker

Research output: Contribution to journalArticleScientificpeer-review

7 Citations (Scopus)
247 Downloads (Pure)

Abstract

We find that health cost risk lowers optimal annuity demand at retirement. If medical expenses can be sizeable early in retirement, full annuitisation at retirement is no longer optimal because agents do not have enough time to build a liquid wealth buffer. Furthermore, large deviations from optimal annuitisation levels lead to small utility differences. Our results suggest that health cost risk can explain a large proportion of empirically observed annuity choices. Finally, allowing additional annuitisation after retirement results in welfare gains of at most 2.5% when facing health cost risk, and negligible gains without this risk.
Original languageEnglish
Pages (from-to)1598-1625
JournalThe Economic Journal
Volume127
Issue number603
DOIs
Publication statusPublished - Aug 2017

Keywords

  • Life-cycle portfolio choice
  • retirement
  • post-retirement investment

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