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 10, 2013
Netspar Discussion Paper No. 01/2010 - 003
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
Date posted: March 30, 2010 ; Last revised: July 18, 2013
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