Annuitization: Keeping Your Options Open



Annuities provide insurance against outliving one’s wealth. Previous studies have indicated that, for many households, the value of the longevity insurance should outweigh the actuarial unfairness of prices in the voluntary annuity market. Nonetheless, voluntary annuitization rates are extremely low.

Previous research on the value of annuitization has compared the alternative of an optimal decumulation of unannuitized wealth with the alternative of annuitizing all unannuitized wealth at age 65. We relax these assumptions, allowing households to annuitize any part of their unannuitized wealth at any age and to return to the annuity market as many times as they wish.

Using numerical optimization techniques, and retaining the assumption made in previous research that half of the household wealth is pre-annuitized, we conclude that it is optimal for couples to delay annuitization until they are aged 74 to 89, and in some cases never to annuitize. It is usually optimal for single men and women to annuitize at substantially younger ages, around 65 and 70 respectively. Households that annuitize will generally wish to annuitize only part of their unannuitized wealth.

Using data from the Asset and Health Dynamics Among the Oldest Old and Health and Retirement Study panels, we show that much of the failure of the average currently retired household to annuitize can be attributed to the exceptionally high proportion of the wealth of these cohorts that is pre-annuitized. We expect younger cohorts to have smaller proportions of pre-annuitized wealth and we project increasing demand for annuitization as successive cohorts age.