Work

Optimal Annuitization with Stochastic Mortality Probabilities

Year: 2013

Type: report

Abstract: The conventional wisdom dating back to Yaari (1965) is that households without a bequest motive should fully annuitize their investments.Numerous market frictions do not break this sharp result.We modify the Yaari framework by allowing a household's mortality risk itself to be stochastic.Annuities still help to hedge longevity risk, but they are now subject to valuation risk.Valuation risk is a powerful gateway mechanism for numerous frictions to reduce annuity demand, even without ad hoc "liquidity constraints."We find that most households should not annuitize any wealth.The optimal level of aggregate net annuity holdings is likely even negative.

Source: National Bureau of Economic Research

DOI: 10.3386/w19211

Authors: Felix Reichling, Kent Smetters

Institutions: Congressional Budget Office, United States Congress, National Bureau of Economic Research, University of Pennsylvania

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

Funders: U.S. Social Security Administration, Australian Government

OpenAlex ID: W1796732405

Cites: 55

Cited by: 24

Related to: 10