Optimal Annuitization with Stochastic Mortality Probabilities

Felix Reichling and Kent Smetters ()

No 19211, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D01 D14 H31 (search for similar items in EconPapers)
Date: 2013-07
New Economics Papers: this item is included in nep-dem
Note: AG EH PE
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Citations: View citations in EconPapers (5)

Published as Reichling, Felix, and Kent Smetters. 2015. "Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs." American Economic Review, 105(11): 3273-3320.

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