The Annuity Puzzle Remains a Puzzle
33 Pages Posted: 30 Mar 2010 Last revised: 27 Jul 2016
Date Written: July 26, 2016
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.
Keywords: Asset allocation, retirement, life-cycle portfolio choice, annuity, savings
JEL Classification: D14, D91, G11, G23
Suggested Citation: Suggested Citation