Optimal Annuity Purchases for Australian Retirees

28 Pages Posted: 3 Sep 2014

See all articles by Fedor Iskhakov

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Susan Thorp

University of Sydney Business School; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Hazel Bateman

UNSW Sydney, CEPAR

Multiple version iconThere are 2 versions of this paper

Date Written: August 31, 2014

Abstract

We develop and simulate a stochastic lifecycle model to investigate optimal annuity purchases at retirement. Retirees can invest in risky assets, purchase fairly priced immediate or deferred lifetime annuities, and are eligible for a targeted safety net pension. We match baseline parameters to current Australian settings and market outcomes. Except where individuals need to insure a consumption floor, both immediate and deferred annuity purchases are largely crowded out by the means tested public pension. Welfare losses caused by zero annuitisation are small compared with the losses caused by completely annuitising all savings, particularly if wealth at retirement is low. Decumulation policy should ensure individuals are well-informed of the insurance value of annuities and accommodate diverse choices.

Keywords: life cycle, household finance, longevity risk

JEL Classification: D140, D910, G230

Suggested Citation

Iskhakov, Fedor and Thorp, Susan and Bateman, Hazel, Optimal Annuity Purchases for Australian Retirees (August 31, 2014). UNSW Australia Business School Research Paper No. 2014ACTL06. Available at SSRN: https://ssrn.com/abstract=2489737 or http://dx.doi.org/10.2139/ssrn.2489737

Fedor Iskhakov (Contact Author)

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6 Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Susan Thorp

University of Sydney Business School ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 6354 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Hazel Bateman

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

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