The annuity puzzle remains a puzzle

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

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

16 Citations (Scopus)
68 Downloads (Pure)

Abstract

We examine incomplete annuity menus, background risk, bequest motives, and default 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 equity-linked annuities to the menu does not increase welfare significantly, since individuals can invest in stocks in order to get the desired equity exposure. (C) 2016 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)18-35
JournalJournal of Economic Dynamics and Control
Volume70
DOIs
Publication statusPublished - Sep 2016

Keywords

  • Asset allocation
  • Life-cycle portfolio choice
  • Annuity
  • Savings

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