The Cost of Annuities
Implications for Saving Behavior and Bequests
DOI:
https://doi.org/10.1016/1057-0810(91)90010-VAbstract
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.)
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