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Annuitization: Keeping Your Options Open

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  • Irena Dushi
  • Anthony Webb
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    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.

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    File URL: http://crr.bc.edu/working-papers/annuitization-keeping-your-options-open/
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    Bibliographic Info

    Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2004-4.

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    Length: 42 Pages
    Date of creation: Mar 2004
    Date of revision: Mar 2004
    Handle: RePEc:crr:crrwps:wp2004-4

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    Cited by:
    1. Ferro, Gustavo, 2008. "On annuities: an overview of the issues," MPRA Paper 20209, University Library of Munich, Germany, revised Oct 2009.
    2. Allison Schrager & G. A. Mackenzie, 2004. "Can the Private Annuity Market Provide Secure Retirement Income?," IMF Working Papers 04/230, International Monetary Fund.
    3. Barbara A. Butrica & Gordon B.T. Mermin, 2006. "Annuitized Wealth and Consumption at Older Ages," Working Papers, Center for Retirement Research at Boston College wp2006-26, Center for Retirement Research, revised Dec 2006.
    4. Ferro, Gustavo, 2008. "Un impulso al mercado de rentas vitalicias en España
      [Promoting the annuities market in Spain]
      ," MPRA Paper 20211, University Library of Munich, Germany, revised Jul 2008.
    5. Oded Palmon & Avia Spivak, 2007. "Adverse selection and the market for annuities," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 37-59, June.

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