Optimal lifetime income annuity without bequest: Single and annual premiums

Ebenezer Fiifi Emire Atta Mills and Siegfried Kafui Anyomi

Finance Research Letters, 2023, vol. 53, issue C

Abstract: This paper studies the optimal annuitization, risk-free investment, and consumption problem in a post-retirement lifecycle model without bequest motives. We characterize annuitization in scenarios where a retiree allocates wealth to a lifetime income annuity in exchange for single or annual premiums. We show that demand for an annuity is influenced by risk aversion in exchange for a single premium and by wealth for annual premiums. The effect of allocating wealth to purchase a lifetime income annuity increases with higher risk aversion for a single premium and decreases with residual wealth for annual premiums. We compare the certainty equivalence of investment yielding the same utility in an actuarially fair pricing framework and show that the product with annual premiums is more attractive. Finally, we show that partial annuitization can be optimal for different risk levels. Our findings thus reflect an explanation for the “annuity puzzle” in the literature on lifecycle consumption.

Keywords: Premiums; Annuities; Optimal allocation; Risk aversion (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007899

DOI: 10.1016/j.frl.2022.103613

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