Stock Market Returns and Annutization at Older Ages

Abstract

Using a novel dataset with over 100,000 actual payout decisions, we investigate the nature of the strong negative relationship between recent stock returns and the annuitization of retirement savings. After controlling for several standard explanations (e.g., wealth effects), we present evidence supporting naive beliefs and extrapolation from past returns. The effect of recent returns on annuitization dramatically increases with age, confirming that the elderly rely most heavily on recent information. Our results provide insights into how beliefs are formed in old age and have implications for the design of public policies seeking to promote annuitization.

Keywords: household finance, retirement Income, annuities, myopic extrapolation, wealth effects

JEL Classification: D14, G11, G22, H55