Optimal Annuitization with Stochastic Mortality Probabilities
NBER Working Paper No. 19211
Issued in July 2013
NBER Program(s):Aging, Health Economics, Public Economics
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.
The NBER Bulletin on Aging and Health provides summaries of publications like this.
You can sign up to receive the NBER Bulletin on Aging and Health by email.
Machine-readable bibliographic record -
Document Object Identifier (DOI): 10.3386/w19211
Users who downloaded this paper also downloaded* these:
|Horneff, Maurer, Mitchell, and Rogalla
||w19206 Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection
|Brown, Kapteyn, Luttmer, and Mitchell
||w19168 Cognitive Constraints on Valuing Annuities
|Allen, Clark, Maki, and Morrill
||w19231 Golden Years or Financial Fears? Decision Making After Retirement Seminars
|Horneff, Maurer, Mitchell, and Dus
||w12392 Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion
|Aruoba and FernÃ¡ndez-Villaverde
||w20263 A Comparison of Programming Languages in Economics