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Accession Number PB2013-111037
Title Optimal Annuitization with Stochastic Mortality Probabilities.
Publication Date Jun 2013
Media Count 46p
Personal Author F. Reichling K. Smetters
Abstract Economic modeling dating back to Yaari (1965) shows that individuals who do not aim to leave bequests to future generations should put all of their investments into annuities rather than alternatives such as bonds. Annuities offer higher returns than alternative investment options and protect against longevity risk--they provide income in each remaining year of life, even if an individual lives for an usually long time. This paper models decisions about purchasing annuities in a context where individuals learn new information about their health status over time (that is, with stochastic mortality risk). In that context, the value of an annuity declines when an individual experiences an adverse health shock that lowers her life expectancy. Because of that valuation risk, risk-averse individuals will not want to fully annuitize their investments when they face higher costs or lower income in bad health. We find that most households should not annuitize any wealth. The optimal level of aggregate net annuity holdings is likely even negative.
Keywords Annuities
Economic model
Health status
Households
Income
Investments
Life styles
Mortality
Probability theory
Risk
Stochastic processes

 
Source Agency Congressional Budget Office
NTIS Subject Category 96 - Business & Economics
44C - Community & Population Characteristics
92C - Social Concerns
Corporate Author Congressional Budget Office, Washington, DC.
Document Type Technical report
Title Note N/A
NTIS Issue Number 1325
Contract Number N/A

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