The Cost of Annuities: Implications for Saving Behavior and Bequests

Benjamin M. Friedman; Mark J. Warshawsky

doi:10.1016/1057-0810(91)90010-V

The Cost of Annuities

Implications for Saving Behavior and Bequests

Authors

Benjamin M. Friedman Harvard University)
Mark J. Warshawsky Harvard University

DOI:

https://doi.org/10.1016/1057-0810(91)90010-V

Abstract

The fact that most elderly U.S. individuals maintain a flat age-wealth profile, rather than buy individual life annuities, contradicts the standard life- cycle consumption model. Average expected yields on individual life annuities in the United States during 19681983 were lower by 4.21-6.13 percent, or 2.43- 4.35 percent after allowing for adverse selection, than yields on plausible iterative investments. Simulations of a model of saving and portfolio allocation show that, during the early retirement years, such yield d~ferentials can account for the absence of annuity purchases even without a bequest motive. At older ages, the combination of such yield differentials and a bequest motive can do so. Quarterly Journal of Economics, Vol. 105, No. 1 (February 1990), pp. 135-154. (Reprinted with permission of the Journal of Economic Literature.)

Published

1991-06-30

How to Cite

Friedman , B. M., & Warshawsky, M. J. (1991). The Cost of Annuities: Implications for Saving Behavior and Bequests. Financial Services Review, 1(1), 79–80. https://doi.org/10.1016/1057-0810(91)90010-V

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Issue

Vol. 1 No. 1 (1991): Financial Services Review

Section

Abstracts of Articles on Individual Financial Management

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