Academics research on Annuitization

• The timing ofannuitization:Investmentdominance and mortality risk, Milevsky, M. A., & Young, V. R. (2007). The timing of annuitization: Investment dominance and mortality risk.Insurance: Mathematics and Economics,40(1), 135-144. We use preference-free dominance arguments to develop a framework for locating the optimal age (time) at which a retiree should purchase an irreversible life annuity, as a function of current annuity prices and mortality tables. Then, using the institutional characteristics of annuity markets in the US, we show that annuitization prior to age 6570 is dominated by self-annuitizationevenin the absence of any bequest motives. And, for retirees who are willing to accept some financial risk in exchange for retaining the benefits of liquidity and bequest, the optimal age can be even later. In addition to the normative implications, these results should help shed light on the so-called annuity puzzle which has been much debated by economists, by focusing attention on thespecific agesfor which a puzzle can actually be said to exist.   
• Behavioral obstacles in theannuitymarket, Hu, W. Y., & Scott, J. S. (2007). Behavioral obstacles in the annuity market.Financial Analysts Journal,63(6), 71-82. As Baby Boomers enter retirement, they will look to the investment industry for ways to generate income from accumulated savings. Why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long-standing puzzle. Mental accounting and loss aversion can explain the unpopularity of annuities by framing them as risky gambles where potential losses loom larger than potential gains. Moreover, behavioral anomalies can explain the prevalence of period certain annuities, which guarantee a minimum number of payouts. Finally, investors may prefer longevity annuities purchased today to begin payouts in the future to immediate annuities because investors overweight the small probability of living long enough to receive large future payouts.   
• Self-annuitization, consumption shortfall in retirement and asset allocation: Theannuitybenchmark, Albrecht, P., & Maurer, R. (2002). Self-annuitization, consumption shortfall in retirement and asset allocation: The annuity benchmark.Journal of Pension Economics & Finance,1(3), 269-288. The present paper considers a retiree of a certain age who is endowed with a certain amount of wealth and is facing alternative investment opportunities. One possibility is to buy a single premium immediate (participating) annuity-contract. This insurance product pays a life-long pension payment of a certain amount, depending e.g. on the age of the retiree, the operating cost of the insurance company and the return the company is able to realize from its investments. The alternative possibility is to invest the single premium into a portfolio of mutual funds and to periodically withdraw a fixed amount that is assumed to be equivalent to the consumption stream generated by the annuity. The particular advantage of this self-annuitization strategy compared to the life annuity is its greater liquidity and the possibility of leaving money for heirs. However, the risk of self-annuitization is to outlive the assets before the uncertain date of death. The risk can thus be specified by considering the probability of running out of money before the uncertain date of death. The determination of this personal probability of consumption shortfall with respect to German insurance and capital market conditions is the objective of this paper.   
• Integrating optimalannuityplanning with consumptioninvestmentselections in retirement planning, Gupta, A., & Li, Z. (2007). Integrating optimal annuity planning with consumptioninvestment selections in retirement planning.Insurance: Mathematics and Economics,41(1), 96-110. nnuities can be effective tools in managing longevity risk in retirement planning. This paper develops a framework that merges annuity purchase decisions with consumptioninvestment selections in retirement planning. After introducing a pricing and a benefit payment model for an annuity, we construct a multi-period wealth evolution model. An optimization problem is formulated with an objective of maximizing lifetime utility of consumption and wealth. Optimal decisions are determined as a trade off between consumption and investment among an annuity, a risky and a risk-free asset. Computational results are provided to illustrate the practical implications of the framework.   
• Lifecycle portfolio choice with systematic longevity risk and variableinvestmentLinked deferredannuities, Maurer, R., Mitchell, O. S., Rogalla, R., & Kartashov, V. (2013). Lifecycle portfolio choice with systematic longevity risk and variable investmentLinked deferred annuities.Journal of Risk and Insurance,80(3), 649-676. This article assesses the impact of variable investmentlinked deferred annuities (VILDAs) on lifecycle consumption and portfolio allocation, allowing for systematic longevity risk. Under a selfinsurance strategy, insurers set premiums to reduce the chance that benefits paid exceed provider reserves. Under a participating approach, the provider avoids taking systematic longevity risk by adjusting benefits in response to unanticipated mortality shocks. Young households with participating annuities average onethird higher excess consumption, while 80yearolds increase consumption about 75 percent. Many households would prefer to participate in systematic longevity risk unless insurers can hedge it at a very low price.