Betting on Death and Capital Markets in Retirement: A Shortfall Risk Analysis of Life Annuities Versus Phased Withdrawal Plans
44 Pages Posted: 12 Feb 2008
Date Written: November 2003
Abstract
How might retirees consider deploying the retirement assets accumulated in a defined contribution pension plan? One possibility would be to purchase an immediate annuity. Another approach, called the "phased withdrawal" strategy in the literature, would have the retiree invest his funds and then withdraw some portion of the account annually. Using this second tactic, the withdrawal rate might be determined according to a fixed benefit level payable until the retiree dies or the funds run out, or it could be set using a variable formula, where the retiree withdraws funds according to a rule linked to life expectancy. Using a range of data consistent with the German experience, we evaluate several alternative designs for phased withdrawal strategies, allowing for endogenous asset allocation patterns, and also allowing the worker to make decisions both about when to retire and when to switch to an annuity. We show that one particular phased withdrawal rule is appealing since it offers relatively low expected shortfall risk, good expected payouts for the retiree during his life, and some bequest potential for the heirs. We also find that unisex mortality tables if used for annuity pricing can make women's expected shortfalls higher, expected benefits higher, and bequests lower under a phased withdrawal program. Finally, we show that delayed annuitization can be appealing since it provides higher expected benefits with lower expected shortfalls, at the cost of somewhat lower anticipated bequests.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
New Evidence on the Money's Worth of Individual Annuities
By Olivia S. Mitchell, James M. Poterba, ...
-
The Cost of Annuities: Implications for Saving Behavior and Bequests
-
Annuities and Individual Welfare
By Thomas Davidoff, Jeffrey R. Brown, ...
-
Annuities and Individual Welfare
By Thomas Davidoff, Jeffrey R. Brown, ...
-
The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program
By Jeffrey R. Brown, Olivia S. Mitchell, ...
-
Joint Life Annuities and Annuity Demand by Married Couples
By Jeffrey R. Brown and James M. Poterba
-
Private Pensions, Mortality Risk, and the Decision to Annuitize
-
Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues