The Annuity Puzzle Remains a Puzzle

32 Pages Posted: 19 Feb 2009 Last revised: 9 Mar 2016

See all articles by Kim Peijnenburg

Kim Peijnenburg

Netspar; Centre for Economic Policy Research (CEPR); EDHEC Business School - Department of Economics & Finance

Theo Nijman

Tilburg University - Tilburg University School of Economics and Management

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 7, 2011

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.

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

JEL Classification: D14, D91, G11

Suggested Citation

Peijnenburg, Kim and Nijman, Theo E. and Werker, Bas J.M., The Annuity Puzzle Remains a Puzzle (February 7, 2011). Available at SSRN: https://ssrn.com/abstract=1341674 or http://dx.doi.org/10.2139/ssrn.1341674

Kim Peijnenburg (Contact Author)

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

EDHEC Business School - Department of Economics & Finance ( email )

France

Theo E. Nijman

Tilburg University - Tilburg University School of Economics and Management ( 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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