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The Annuity Puzzle Remains a Puzzle

33 Pages Posted: 30 Mar 2010 Last revised: 27 Jul 2016

Kim Peijnenburg

Netspar; HEC Paris; Centre for Economic Policy Research (CEPR)

Theo Nijman

Tilburg University - Center and Faculty of Economics and Business Administration

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 26, 2016

Abstract

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

Peijnenburg, Kim and Nijman, Theo and Werker, Bas J. M., The Annuity Puzzle Remains a Puzzle (July 26, 2016). Journal of Economic Dynamics and Control, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1578301 or http://dx.doi.org/10.2139/ssrn.1578301

Kim Peijnenburg (Contact Author)

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Theo E. Nijman

Tilburg University - Center and Faculty of Economics and Business Administration ( 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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