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Optimal Annuity Purchases for Australian Retirees

Author

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  • Fedor Iskhakov
  • Susan Thorp
  • Hazel Bateman

Abstract

type="main" xml:id="ecor12183-abs-0001"> We develop and simulate a stochastic lifecycle model to investigate optimal annuity purchases at retirement. Retirees can invest in risky assets, purchase fairly priced immediate or deferred lifetime annuities, and are eligible for a targeted safety net pension. We match baseline parameters to current Australian settings and conduct scenario analyses over a wide range of individual preferences and financial market outcomes. Except where individuals need to insure a consumption floor, both immediate and deferred annuity purchases are largely crowded out by the means-tested public pension. Welfare losses caused by zero annuitisation are small compared with the losses caused by completely annuitising all savings, particularly if wealth at retirement is low. Decumulation policy should ensure individuals are well informed of the insurance value of annuities and accommodate diverse choices.

Suggested Citation

  • Fedor Iskhakov & Susan Thorp & Hazel Bateman, 2015. "Optimal Annuity Purchases for Australian Retirees," The Economic Record, The Economic Society of Australia, vol. 91(293), pages 139-154, June.
  • Handle: RePEc:bla:ecorec:v:91:y:2015:i:293:p:139-154
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    File URL: http://hdl.handle.net/10.1111/ecor.2015.91.issue-293
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:insuma:v:75:y:2017:i:c:p:32-47 is not listed on IDEAS
    2. Johan G. Andreasson & Pavel V. Shevchenko, 2016. "The 2015-2017 policy changes to the means-tests of Australian Age Pension: implication to decisions in retirement," Papers 1611.08330, arXiv.org.
    3. repec:gam:jrisks:v:5:y:2017:i:3:p:47-:d:111425 is not listed on IDEAS
    4. Johan G. Andreasson & Pavel V. Shevchenko & Alex Novikov, 2016. "Optimal Consumption, Investment and Housing with Means-tested Public Pension in Retirement," Papers 1606.08984, arXiv.org.
    5. Jinhui Zhang & Sachi Purcal & Jiaqin Wei, 2017. "Optimal Time to Enter a Retirement Village," Risks, MDPI, Open Access Journal, vol. 5(1), pages 1-20, March.
    6. Federica Teppa & Susan Thorp & Hazel Bateman, 2015. "Family, friends and framing: A cross-country study of subjective survival expectations," DNB Working Papers 491, Netherlands Central Bank, Research Department.

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