Optimal lifetime income annuity without bequest: Single and annual premiums

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This paper studies the optimal annuitization, risk-free investment, and consumption problem in a post-retirement lifecycle model without bequest motives. We characterize annuitization in scenarios where a retiree allocates wealth to a lifetime income annuity in exchange for single or annual premiums. We show that demand for an annuity is influenced by risk aversion in exchange for a single premium and by wealth for annual premiums. The effect of allocating wealth to purchase a lifetime income annuity increases with higher risk aversion for a single premium and decreases with residual wealth for annual premiums. We compare the certainty equivalence of investment yielding the same utility in an actuarially fair pricing framework and show that the product with annual premiums is more attractive. Finally, we show that partial annuitization can be optimal for different risk levels. Our findings thus reflect an explanation for the “annuity puzzle” in the literature on lifecycle consumption.

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Finance Research Letters



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