The Annuity Puzzle Remains a Puzzle
Bocconi University - Department of Finance; Netspar; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research
Tilburg University - Center and Faculty of Economics and Business Administration
Bas J. M. Werker
Tilburg University - Center for Economic Research (CentER)
July 26, 2016
Journal of Economic Dynamics and Control, Forthcoming
We examine incomplete annuity menus, background risk, bequest motives, and default 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 equity-linked annuities to the menu does not increase welfare significantly, since individuals can invest in stocks in order to get the desired equity exposure.
Number of Pages in PDF File: 33
Keywords: Asset allocation, retirement, life-cycle portfolio choice, annuity, savings
JEL Classification: D14, D91, G11, G23
Date posted: March 30, 2010 ; Last revised: July 27, 2016
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