The Science of Flexible Retirement Choices: Switching Retirement Savings into an Annuity
Posted: 25 Apr 2023
Date Written: April 18, 2023
Abstract
In this paper we consider the choice that retirees might make between drawing down from their pension pot and the purchase of an annuity. A key finding of our research that in a world of ‘loss aversion’, across a very wide range of assumptions, there is almost always a ‘crossover point’ during retirement at which moving out of drawdown into an annuity can be the optimal strategy. This suggests that the pensions industry should investigate the construction of a hybrid, ‘flex-first, fix-later’ pension product. We show that a ‘hybrid’ approach can produce much higher levels of happiness, especially at older ages, than staying wholly in drawdown or from buying an annuity at the point of retirement.
Keywords: Sequence Risk; Longevity Risk, Withdrawal Risk, Delayed Annuities, Adaptive Withdrawals, Residual Sum
JEL Classification: G10, G11, G22
Suggested Citation: Suggested Citation