The Annuity Puzzle Remains a Puzzle

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

Research output: Working paperDiscussion paperOther research output

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
PublisherNETSPAR
Number of pages34
Publication statusPublished - Jul 2013

Publication series

NameNETSPAR Discussion Paper
Volume01/2010-003

Fingerprint

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

Keywords

  • asset allocation
  • Life-cycle portfolio choice
  • annuity
  • savings

Cite this

Peijnenburg, J. M. J., Werker, B., & Nijman, T. (2013). The Annuity Puzzle Remains a Puzzle. (NETSPAR Discussion Paper; Vol. 01/2010-003). Tilburg: NETSPAR.
Peijnenburg, J.M.J. ; Werker, Bas ; Nijman, Theo. / The Annuity Puzzle Remains a Puzzle. Tilburg : NETSPAR, 2013. (NETSPAR Discussion Paper).
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Peijnenburg, JMJ, Werker, B & Nijman, T 2013 'The Annuity Puzzle Remains a Puzzle' NETSPAR Discussion Paper, vol. 01/2010-003, NETSPAR, Tilburg.

The Annuity Puzzle Remains a Puzzle. / Peijnenburg, J.M.J.; Werker, Bas; Nijman, Theo.

Tilburg : NETSPAR, 2013. (NETSPAR Discussion Paper; Vol. 01/2010-003).

Research output: Working paperDiscussion paperOther research output

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Peijnenburg JMJ, Werker B, Nijman T. The Annuity Puzzle Remains a Puzzle. Tilburg: NETSPAR. 2013 Jul. (NETSPAR Discussion Paper).