What Makes Annuitization More Appealing?

43 Pages Posted: 30 Nov 2012 Last revised: 15 Dec 2012

See all articles by John Beshears

John Beshears

Harvard Business School; National Bureau of Economic Research (NBER)

James J. Choi

Yale School of Management; National Bureau of Economic Research (NBER)

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Brigitte C. Madrian

Brigham Young University Marriott School of Business; National Bureau of Economic Research (NBER)

Stephen P. Zeldes

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: November 2012

Abstract

We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an "all or nothing" decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that highlight flexibility, control, and investment significantly reduce annuitization. A majority of respondents prefer to receive an extra "bonus" payment during one month of the year that is funded by slightly lower payments in the remaining months. Concerns about later-life income, spending flexibility, and counterparty risk are the most important self-reported motives that influence the annuitization decision.

Suggested Citation

Beshears, John and Choi, James J. and Laibson, David I. and Madrian, Brigitte C. and Zeldes, Stephen P., What Makes Annuitization More Appealing? (November 2012). NBER Working Paper No. w18575. Available at SSRN: https://ssrn.com/abstract=2183035

John Beshears (Contact Author)

Harvard Business School ( email )

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James J. Choi

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David I. Laibson

Harvard University - Department of Economics ( email )

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Brigitte C. Madrian

Brigham Young University Marriott School of Business ( email )

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Stephen P. Zeldes

Columbia Business School - Finance and Economics ( email )

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