Optimal Annuitization with Incomplete Annuity Markets and Background Risk During Retirement

J.M.J. Peijnenburg, T.E. Nijman, B.J.M. Werker

Research output: Working paperDiscussion paperOther research output

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Abstract

We examine incomplete annuity menus and background risk as possible drivers of divergence from full annuitization. Contrary to what is often suggested in the literature, we find that full annuitization remains optimal if saving is possible after retirement. This holds irrespective of whether real or only nominal annuities are available. Whenever liquidity is desired, individuals save sizeable amounts out of their annuity income to smooth consumption shocks. Similarly, adding variable annuities to the menu does not increase welfare significantly, since individuals can save in order to get the desired equity exposure. We calculate bounds on a possible bequest motive and default risk of the annuity provider and find that for realistic parameters full annuitization remains optimal.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages30
Volume2010-11
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-11

Fingerprint

Market risk
Annuitization
Retirement
Annuities
Background risk
Menu
Equity
Default risk
Variable annuities
Income
Liquidity
Divergence
Bequest motive

Keywords

  • Optimal life cycle portfolio choice
  • annuity
  • savings
  • retirement

Cite this

Peijnenburg, J. M. J., Nijman, T. E., & Werker, B. J. M. (2010). Optimal Annuitization with Incomplete Annuity Markets and Background Risk During Retirement. (CentER Discussion Paper; Vol. 2010-11). Tilburg: Finance.
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Peijnenburg, JMJ, Nijman, TE & Werker, BJM 2010 'Optimal Annuitization with Incomplete Annuity Markets and Background Risk During Retirement' CentER Discussion Paper, vol. 2010-11, Finance, Tilburg.

Optimal Annuitization with Incomplete Annuity Markets and Background Risk During Retirement. / Peijnenburg, J.M.J.; Nijman, T.E.; Werker, B.J.M.

Tilburg : Finance, 2010. (CentER Discussion Paper; Vol. 2010-11).

Research output: Working paperDiscussion paperOther research output

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