Abstract

http://ssrn.com/abstract=1578301
 
 

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The Annuity Puzzle Remains a Puzzle


Kim Peijnenburg


Bocconi University - Department of Finance; Netspar; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Theo Nijman


Tilburg University - Center and Faculty of Economics and Business Administration

Bas J. M. Werker


Tilburg University - Center for Economic Research (CentER)

July 10, 2013

Netspar Discussion Paper No. 01/2010 - 003

Abstract:     
We examine incomplete annuity menus and background risk as possible drivers of divergence from full annuitization. Contrary to what is often suggested in the literature, we find that full annuitization remains optimal if saving is possible after retirement. This holds irrespective of whether real or only nominal annuities are available. Whenever liquidity is desired, individuals save sizeable amounts out of their annuity income to smooth consumption shocks. Similarly, adding variable annuities to the menu does not increase welfare significantly, since individuals can save in order to get the desired equity exposure. We calculate bounds on a possible bequest motive and default risk of the annuity provider and find that for realistic parameters full annuitization remains optimal.

Number of Pages in PDF File: 34

Keywords: Asset allocation, retirement, life-cycle portfolio choice, annuity, savings

JEL Classification: D14, D91, G11, G23

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Date posted: March 30, 2010 ; Last revised: July 18, 2013

Suggested Citation

Peijnenburg, Kim and Nijman, Theo and Werker, Bas J. M., The Annuity Puzzle Remains a Puzzle (July 10, 2013). Netspar Discussion Paper No. 01/2010 - 003. Available at SSRN: http://ssrn.com/abstract=1578301 or http://dx.doi.org/10.2139/ssrn.1578301

Contact Information

Kim Peijnenburg (Contact Author)
Bocconi University - Department of Finance ( email )
Via Roentgen 1
Milano, MI 20136
Italy
Netspar ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )
Via Roentgen 1
Milan, 20136
Italy
Theo E. Nijman
Tilburg University - Center and Faculty of Economics and Business Administration ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)
Bas J.M. Werker
Tilburg University - Center for Economic Research (CentER) ( email )
Econometrics and Finance Group
5000 LE Tilburg
Netherlands
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