The timing of annuitization: Investment dominance and mortality risk

Milevsky, Moshe A.; Young, Virginia R.

doi:10.1016/j.insmatheco.2006.03.005

Cited by 38 publications

(28 citation statements)

References 19 publications

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“…However, in practice annuities are seen to make sense for only a small fraction of people, and even fewer of them actually convert their liquid assets into payout annuities (Modigliani, 1986;Friedman and Warshawsky, 1990;Brown, 2001;Milevsky, 2004;Milevsky and Young, 2005). Milevsky (2004) pointed out that only 1.57% of the Health and Retirement Survey (HRS) respondents reported annuity income, and only 8.0% of respondents with a defined contribution pension plan selected an annuity payout.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Mitchell et al (1999) estimated that the expected present value of annuity payments is only about 84% of the annuity cost. Milevsky and Young (2005) argued that the restricted investment choices available under annuity contracts and the high mortality risk fee charged by the annuity issuer are the most important factors to understand the annuity puzzle. The average annual expense on variable annuity subaccounts currently stands at 2.08%, while the average mutual fund charges just 1.38%.…”

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Integrating optimal annuity planning with consumption–investment selections in retirement planning

Gupta

2007

Insurance: Mathematics and Economics

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Integrating optimal annuity planning with consumption–investment selections in retirement planning

Gupta

2007

Insurance: Mathematics and Economics

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“…According to Mitchell et al (1999) and Friedmann and Warshawsky (1990), this transaction cost it is mainly due to expenses, profit margins, and contingency funds. However, Milevsky and Young (2007) point out that for variable-payment annuities there is a explicit mortality risk fee. They believe that while some economists might classify any additional fee as transaction costs, this particular fee is an inseparable component of aggregate mortality risk and creates a unique impediment to annuitization.…”

Section: Discussionmentioning

confidence: 99%

Assessing Investment and Longevity Risks within Immediate Annuities

Bauer

Weber

2008

Asia-Pacific Journal of Risk and Insurance

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“…Their model was built on Merton (1971) and solved by the standard continuous-time technology. Milevsky and Young (2007) argued that in the US annuitization prior to age 65-70 was not optimal even in the absence of any bequest motives.…”

Section: Introductionmentioning

confidence: 99%

Annuitization and Retirement Timing Decisions

Shi¹

2008

SSRN Journal

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This paper analyzes retirement timing decisions of DC pension plan members.In this paper the optimal annuitization timing decision is incorporated into the retirement timing decision. I …rst develop a retirement decision model and generate a forward looking retirement likelihood measure from this model. This measure describes the probability that an individual will retire within the next few years. In the model, the individual obtains utility from leisure, labor income before retirement and pension bene…t after retirement. The DC pension bene…t is the income from the annuity which is bought at the optimal time. The retirement likelihood measure is then tested with the English Longitudinal Study of Ageing (ELSA) data. From investigating the retirement decisions of the sample members in the second wave of ELSA, I conclude that the retirement likelihood measure is a good predictor of actual retirement decisions.Keywords: Retirement, Annuitization, Optimal Stopping Time JEL Classi…cation Codes: J26, G12 I thank Rik Frehen, Kai Li, Theo Nijman, Frank de Jong, Roel Mehlkopf, Bertrand Melenberg, Eytan Sheshinski, Jonathan Skinner, Bas Werker and seminar participants at Tilburg University, FMA European Meeting Doctoral Student Consortium (Prague) and Netspar Workshop in Den Haag for useful comments and discussions.y CentER, Netspar, and TILEC, Department of Finance, Tilburg University, Warandelaan 2, P.O. Box 90153, 5000 LE, Tilburg, the Netherlands. Email: z.shi@uvt.nl. 1 I IntroductionIn recent years, there has been a signi…cant shift from De…ned Bene…t (DB) to De…ned Contribution (DC) pension plans in a number of countries, including the U.S., the U.K. and Australia. In the U.S., the number of DB plans has declined sharply in recent years, from 112,208 in 1985112,208 in to about 29,600 in 2004112,208 in (FDIC 2006. In the U.K., DC plans started widely about two decades ago. At 2002, approximately a third of pension schemes in the U.K. are DC and the trend away from DB funds is expected to accelerate in coming years (Ross and Wills 2002). This shift makes it increasingly interesting to understand determinants of DC pension plan participants'retirement decisions.Retirement decisions of individuals with DC plans are in ‡uenced jointly by many factors, for example, expected and realized investment returns, the individuals'risk aversion, the mortality rate, the subjective valuation of leisure, the labor income and its expected growth rate. DC pension plans generally provide bene…t in the form of a lump-sum payment. In some countries, for example, the U.S., there are no obligations to annuitize DC wealth, while in others, for example, the U.K., there are obligations to do so. The seminal paper of Yaari (1965) argues that, in the absence of bequest motive, all retirement wealth should be annuitized. There are two reasons supporting this view. One is that without annuitization there is a risk that the retirees might consume too much so that they will exhaust their retirement resource before they die. The other on...

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The timing of annuitization: Investment dominance and mortality risk

Cited by 38 publications

References 19 publications

Integrating optimal annuity planning with consumption–investment selections in retirement planning

Integrating optimal annuity planning with consumption–investment selections in retirement planning

Assessing Investment and Longevity Risks within Immediate Annuities

Annuitization and Retirement Timing Decisions

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