The Demand for Annuities with Stochastic Mortality Probabilities

Felix Reichling, Kent Smetters

NBER Retirement Research Center Paper No. NB 12-10
Issued in September 2012

The conventional wisdom dating back to Yaari (1965) is that households without a bequest motive should fully annuitize their assets. Various market frictions do not break this sharp result result. This paper demonstrates that incomplete annuitization can be optimal in the presence of stochastic mortality probabilities, even without any liquidity constraints. Moreover, stochastic mortality probabilities are a mechanism for various other market frictions to further reduce annuity demand.

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