Purchasing an Annuity: Now or Later? The Role of Interest Rates

Thijs Markwat, Roderick Molenaar and Juan Carlos Rodriguez
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Thijs Markwat: Robeco Asset Management
Roderick Molenaar: Robeco Asset Management
Juan Carlos Rodriguez: Tilburg University

Bankers, Markets & Investors, 2016, issue 142, 4-17

Abstract: This paper investigates whether the option to delay annuitization in times of low interest rates has value for retirees. The retiree who chooses to wait bets on a fall in the annuity price brought about by a rise in the interest rates; the cost of such a bet is the loss of the mortality credit during the waiting period. We show that an investor who can only invest in bonds during the waiting period will never find waiting ex-ante profitable if annuities are fairly priced, because waiting is costly and buying a fairly priced annuity is a zero-npv project. In contrast, an investor allowed to invest part of her wealth in the stock market will be able to attain more consumption on average, but at the cost of a sharp increase in risk. A retiree may choose to wait, however, if she believes her views are not priced in the term structure. For such a retiree, waiting is optimal if the expected increase in the interest rate is larger than the square of the hazard rate.

Keywords: Annuities; Interest Rates; Financial Crises (search for similar items in EconPapers)
JEL-codes: G21 G22 (search for similar items in EconPapers)
Date: 2016
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