The Cost of Annuities: Implications for Saving Behavior and Bequests

  • Friedman B
  • Warshawsky M
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Abstract

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 1968-1983 were lower by 4.21-6.13 percent, or 2.43-4.35 percent after allowing for adverse selection, than yields on plausible alternative investments. Simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials 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. [ABSTRACT FROM AUTHOR]

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Authors

  • Benjamin M. Friedman

  • Mark J. Warshawsky

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