The timing of annuitization: Investment dominance and mortality risk', Insurance

TITLE: The Timing of Annuitization: Investment Dominance and Mortality Risk We use preference-free dominance arguments to develop a framework for locating the optimal age (time) at which to purchase an irreversible life annuity. Then, using annuity-pricing mortality tables and the characteristics of real-world annuity payouts, we show that annuitization prior to age 65-70 is dominated by self-annuitization even in the absence of any bequest motives. For retirees who are willing to accept some risk in exchange for retaining the bene\u85ts of liquidity and bequest, the optimal age can be even higher. Aside from the normative implications within the context of proposals to reform Social Security, these results should help shed light on the annuity puzzle by focusing researchers attention on the speci\u85c ages for which a puzzle can actually be said to exist. 1 The Main Claim There are two stylized facts about the market for \u85xed and variable-payout annuities that impede Yaaris (1965) full annuitization results, as well as the recent extension by Davido¤, Brown, and Diamond (2005). These facts, which have not received much attention in th