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Optimal Annuity Purchase Decisions Under Uncertain Lifetime

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  • Aparna Gupta
  • Zhisheng Li

Abstract

This paper developed a wealth allocation framework for longevity risk protection under stochastic lifetime. By combining the dynamics of wealth evolution and health evolution in stochastic multi-period discrete-time models, an optimization problem was formulated with the objective of maximizing lifetime utility of consumption and bequest. We implemented the framework in different scenarios and provided results to illustrate the practical implications of the framework. Computational results suggested that it is optimal for most people to purchase an annuity at some point in their lives. However, an individual’s health status, risk aversion, retirement objective, and the insurance charge associated with annuities could significantly influence the choice of optimal annuitization time, consumption plans, and trade off between lifetime versus fixed-term annuity. Copyright Springer Science+Business Media New York 2013

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  • Aparna Gupta & Zhisheng Li, 2013. "Optimal Annuity Purchase Decisions Under Uncertain Lifetime," Journal of Family and Economic Issues, Springer, vol. 34(4), pages 447-459, December.
    • Handle: RePEc:kap:jfamec:v:34:y:2013:i:4:p:447-459
    DOI: 10.1007/s10834-012-9340-1
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    2. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    3. Che-cheong Poon & Tai-Yuen Hon, 2015. "Household Savings in Hong Kong: A Statistical Analysis," Journal of Family and Economic Issues, Springer, vol. 36(3), pages 353-368, September.

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