The Costs of Annuitizing Retirement Payouts from Individual Accounts

37 Pages Posted: 12 Mar 1999 Last revised: 16 May 2000

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Mark J. Warshawsky

Towers Watson; Mercatus Center at George Mason University

Date Written: January 1999

Abstract

This paper presents new evidence on the costs of purchasing private annuity contracts to spread a given stock of assets over an uncertain future lifetime. It also describes the operation of individual annuity arrangements within two large group retirement saving plans. First presents information on life annuity contracts that are now available in the individual single-premium-immediate annuity marketplace. For a 65-year-old male annuity buyer present discounted value of the payouts offered by the average policy available in June 1998 was approximately 85 percent of the purchase price. This assumes that the individual faces the mortality risks of the average individual in the population, and that the payouts are discounted at a riskless interest rate. The expected present value of payouts rises if we assume that the buyer faces the mortality rates of the typical annuitant, while it declines if we assume a higher riskier, interest rate for discounting. Second, the paper considers individual annuity policies available to participants in the government's Thrift Savings Plan. Because these annuities are purchased through a large group retirement saving program, some of the administrative costs are lower than those in the national individual annuity market. The expected present value of payouts is correspondingly higher than that in the public' market. Third individual annuity products offered by TIAA-CREF, the retirement system for college and university employees. TIAA offers annuities with non-guaranteed elements the highest payouts in the individual annuity market, mainly due to superior investment returns and low expenses. CREF annuities offer valuable payouts that reflect basis, the investment experience of the accounts.

Suggested Citation

Poterba, James M. and Warshawsky, Mark J., The Costs of Annuitizing Retirement Payouts from Individual Accounts (January 1999). NBER Working Paper No. w6918. Available at SSRN: https://ssrn.com/abstract=148344

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Mark J. Warshawsky

Towers Watson ( email )

Arlington, VA
United States

Mercatus Center at George Mason University

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

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