Longevity Annuity: An Annuity for Everyone?

Abstract

As of 2005, individuals had an estimated $7.4 trillion invested in IRAs and employer-sponsored retirement accounts. Given these investments, many retirees will face the difficult problem of turning a pool of assets into a stream of retirement income. Purchasing an immediate annuity is a common recommendation for retirees looking to maximize retirement spending. However, the vast majority of retirees are unwilling to annuitize all of their assets. This paper demonstrates that a new type of annuity, a longevity annuity, is optimal for retirees unwilling to fully annuitize. For a typical retiree, allocating 10%-15% of wealth to a longevity annuity creates spending benefits comparable to an immediate annuity allocation of 60% or more.

Keywords: Annuity, annuitization, pensions, longevity risk, insurance, Social Security

JEL Classification: D11, D91, E21, H55, J14, J26