Articles

Health Cost Risk: A Potential Solution to the Annuity Puzzle

K. PEIJNENBURG, T. NIJMAN, B. J. M. WERKER

Economic Journal

aout 2017, vol. 127, n°603, pp.1598–1625

Departments: Finance

Keywords: Life-cycle portfolio choice;retirement;post-retirement investment

http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12354/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


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