IDEAS home Printed from https://ideas.repec.org/a/bla/jrinsu/v72y2005i2p302-320.html
   My bibliography  Save this article

The Implied Longevity Yield: A Note on Developing an Index for Life Annuities

Author

Listed:
  • Moshe A. Milevsky

Abstract

I develop an index for tracking the dynamic behavior of life (pension) annuity payouts over time, based on the concept of self‐annuitization. Our implied longevity yield (ILY) value is defined equal to the internal rate of return (IRR) over a fixed deferral period that an individual would have to earn on their investable wealth if they decided to self‐annuitize using a systematic withdrawal plan. A larger ILY number indicates a greater relative benefit from immediate annuitization. I use age 65—with a 10‐year period certain—compared against the same annuity at age 75 as the standard benchmark for the index, and calibrate to a comprehensive time series of weekly (Canadian) life annuity quotes from 2000 through 2004. I find that during this period the ILY varied from 5.45 percent to 6.90 percent for males and from 5.00 percent to 6.42 percent for females and was highly correlated with a duration‐weighted average yield of 10‐year and long‐term Government of Canada bonds. I believe our ILY metric can help promote and explain the benefits of acquiring lifetime payout annuities by translating the abstract‐sounding longevity insurance into more concrete and measurable financial rates of return.

Suggested Citation

  • Moshe A. Milevsky, 2005. "The Implied Longevity Yield: A Note on Developing an Index for Life Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 302-320, June.
    • Handle: RePEc:bla:jrinsu:v:72:y:2005:i:2:p:302-320
    DOI: 10.1111/j.1539-6975.2005.00124.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1539-6975.2005.00124.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1539-6975.2005.00124.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thomas Post & Helmut Gründl & Hato Schmeiser, 2006. "Portfolio management and retirement: what is the best arrangement for a family?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(3), pages 265-285, September.
    2. Stone Charles A. & Zissu Anne, 2007. "Managing Viagers Securitization and Life Extension Risk," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 2(1), pages 1-13, May.
    3. Horneff, Wolfram & Maurer, Raimond & Rogalla, Ralph, 2010. "Dynamic portfolio choice with deferred annuities," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2652-2664, November.
    4. Yang, Jaehwan & Yuh, Yoonkyung, 2019. "Reverse Mortgages for Managing Longevity Risk in Korea," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 60(1), pages 21-40, June.
    5. Yuh, Yoonkyung & Yang, Jaehwan, 2011. "The Valuation and Redistribution Effect of the Korea National Pension," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 52(1), pages 113-142, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Butler, Monika & Teppa, Federica, 2005. "Should You Take a Lump-Sum or Annuitize? Results from Swiss Pension Funds," CEPR Discussion Papers 5316, C.E.P.R. Discussion Papers.
    2. Peijnenburg, J.M.J. & Nijman, T.E. & Werker, B.J.M., 2010. "Optimal Annuitization with Incomplete Annuity Markets and Background Risk During Retirement," Other publications TiSEM 0b8e2130-a64a-48c1-97d6-8, Tilburg University, School of Economics and Management.
    3. Horneff, Wolfram J. & Maurer, Raimond H. & Stamos, Michael Z., 2008. "Life-cycle asset allocation with annuity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3590-3612, November.
    4. Park, Seyoung, 2015. "A generalization of Yaari’s result on annuitization with optimal retirement," Economics Letters, Elsevier, vol. 137(C), pages 17-20.
    5. Cormac O'Dea & David Sturrock, 2023. "Survival Pessimism and the Demand for Annuities," The Review of Economics and Statistics, MIT Press, vol. 105(2), pages 442-457, March.
    6. Giovanna Apicella & Enrico G. De Giorgi, 2024. "A behavioral gap in survival beliefs," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 91(1), pages 213-247, March.
    7. Hazel Bateman & Christine Eckert & Fedor Iskhakov & Jordan Louviere & Stephen Satchell & Susan Thorp, 2017. "Default and naive diversification heuristics in annuity choice," Australian Journal of Management, Australian School of Business, vol. 42(1), pages 32-57, February.
    8. Johannes Hagen, 2015. "The determinants of annuitization: evidence from Sweden," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 549-578, August.
    9. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    10. Torben M. Andersen & Marias H. Gestsson, 2021. "Annuitization and aggregate mortality risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(1), pages 79-99, March.
    11. David Blake & Marco Morales & Enrico Biffis & Yijia Lin & Andreas Milidonis, 2017. "Special Edition: Longevity 10 – The Tenth International Longevity Risk and Capital Markets Solutions Conference," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(S1), pages 515-532, April.
    12. Bockweg, Christian & Ponds, Eduard & Steenbeek, Onno & Vonken, Joyce, 2018. "Framing and the annuitization decision – Experimental evidence from a Dutch pension fund," Journal of Pension Economics and Finance, Cambridge University Press, vol. 17(3), pages 385-417, July.
    13. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    14. Erin Cottle Hunt & Frank N. Caliendo, 2022. "Social security and risk sharing: A survey of four decades of economic analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1591-1609, December.
    15. Sanders, Lisanne & De Waegenaere, Anja & Nijman, Theo E., 2013. "When can insurers offer products that dominate delayed old-age pension benefit claiming?," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 134-149.
    16. Sanders, Lisanne & Melenberg, Bertrand, 2016. "Estimating the joint survival probabilities of married individuals," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 88-106.
    17. Sanders, E.A.T. & De Waegenaere, A.M.B. & Nijman, T.E., 2010. "When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming?," Other publications TiSEM ea3f9bbb-92ce-4dfe-a1fe-e, Tilburg University, School of Economics and Management.
    18. Ben J. Heijdra & Yang Jiang & Jochen O. Mierau, 2019. "The Macroeconomic Effects of Longevity Risk Under Private and Public Insurance and Asymmetric Information," De Economist, Springer, vol. 167(2), pages 177-213, June.
    19. d’Albis, Hippolyte & Attanasi, Giuseppe & Thibault, Emmanuel, 2020. "An experimental test of the under-annuitization puzzle with smooth ambiguity and charitable giving," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 694-717.
    20. Hanbali, Hamza, 2025. "Mean-variance longevity risk-sharing for annuity contracts," Insurance: Mathematics and Economics, Elsevier, vol. 120(C), pages 207-235.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jrinsu:v:72:y:2005:i:2:p:302-320. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/ariaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.