The Cost of Annuities: Implications for Saving Behavior and Bequests

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. It is common experience that as we grow older and nearer to eternity we become more, not less, anxious about money [Derek Brewer, Chaucer and His World , p. 213].