New Evidence on the Money's Worth of Individual Annuities

Olivia S. Mitchell, James M. Poterba, Mark J. Warshawsky

NBER Working Paper No. 6002 (Also Reprint No. r2255)
Issued in April 1997
NBER Program(s):   AG   AP   PE

This paper presents new information on the expected present discounted value of payouts on individual life annuities. The annuity we examine is the single premium immediate life annuity, an insurance product that pays out a nominal level sum as long as the covered person lives, in exchange for an initial lump-sum premium. This annuity offers protection against the risk of someone outliving his saving, given uncertainty about longevity. For reasonable estimates of behavioral parameters, we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption. We also find that the expected present discounted value of payouts, relative to the initial cost of the annuity, has increased over the last decade. These findings bear on the policy debate regarding the role of individual choice and self-reliance in retirement planning.

download in pdf format
   (870 K)

email paper

An NBER digest for this paper is available.

A non-technical summary of this paper is available in the NBER Bulletin on Aging and Health. You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (870 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6002

Published: American Economic Review, vol. 89, no. 5 (December 1999): 1299-1318. citation courtesy of

Users who downloaded this paper also downloaded these:
Davidoff, Brown, and Diamond w9714 Annuities and Individual Welfare
Brown and Poterba w7199 Joint Life Annuities and Annuity Demand by Married Couples
Brown w13537 Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning
Brown, Mitchell, and Poterba w7812 Mortality Risk, Inflation Risk, and Annuity Products
Brown, Kling, Mullainathan, and Wrobel w13748 Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us