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What Makes Annuitization More Appealing?

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  • John Beshears
  • James J. Choi
  • David Laibson
  • Brigitte C. Madrian
  • Stephen P. Zeldes

Abstract

We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an “all or nothing” decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that highlight flexibility, control, and investment significantly reduce annuitization. A majority of respondents prefer to receive an extra “bonus” payment during one month of the year that is funded by slightly lower payments in the remaining months. Concerns about later-life income, spending flexibility, and counterparty risk are the most important self-reported motives that influence the annuitization decision.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18575.

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Date of creation: Nov 2012
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Publication status: published as What Makes Annuitization More Appealing? , John Beshears, James Choi, David Laibson, Brigitte C. Madrian, Stephen P. Zeldes. in Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century , Clark, Rauh, and Duggan. 2014
Handle: RePEc:nbr:nberwo:18575

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  1. Gaobo Pang, Mark J. Warshawsk, . "Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses," Research Reports 4, Watson Wyatt Worldwide.
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