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Health cost risk: A potential solution to the annuity puzzle
Peijnenburg,J.M.J. Nijman,Theo Werker,Bas J.M.
Peijnenburg,J.M.J.
Nijman,Theo
Werker,Bas J.M.
Abstract
We find that health cost risk lowers optimal annuity demand at retirement. If medical expenses can be sizeable early in retirement, full annuitisation at retirement is no longer optimal because agents do not have enough time to build a liquid wealth buffer. Furthermore, large deviations from optimal annuitisation levels lead to small utility differences. Our results suggest that health cost risk can explain a large proportion of empirically observed annuity choices. Finally, allowing additional annuitisation after retirement results in welfare gains of at most 2.5% when facing health cost risk, and negligible gains without this risk.
Description
Date
2017-08
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
Life-cycle portfolio choice, retirement, post-retirement investment, D14 - Household Saving; Personal Finance, D91 - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, G11 - Portfolio Choice ; Investment Decisions, I1 - Health
Citation
Peijnenburg, J M J, Nijman, T & Werker, B J M 2017, 'Health cost risk : A potential solution to the annuity puzzle', Economic Journal, vol. 127, no. 603, pp. 1598-1625. https://doi.org/10.1111/ecoj.12354