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The Cost of Annuities: Implications for Saving Behavior and Bequests

  • Friedman, Benjamin M
  • Warshawsky, Mark J
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    The fact that most elderly U.S. individuals maintain a flat age-wealth profile, rather than buy individual life annuities, contradicts the standard life-cycle consumption model. Average expected yields on individual life annuities in the United States during 1968-83 were lower by 4.21-6.13 percent, or 2.43-4.35 percent after allowing for adverse selection, than yields on plausible alternative investments. Simulations of a model of saving and portfolio allocation show that, during the early retirement years, such yield differentials can account for the absence of annuity purchases even without a bequest motive. At older ages, the combination of such yield differentials and a bequest motive can do so. Copyright 1990, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    Article provided by MIT Press in its journal Quarterly Journal of Economics.

    Volume (Year): 105 (1990)
    Issue (Month): 1 (February)
    Pages: 135-54

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    Handle: RePEc:tpr:qjecon:v:105:y:1990:i:1:p:135-54
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