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Bequest Motives and the Annuity Puzzle
1University of Chicago 1126 E. 59th St. Chicago, IL 60637, USA.
Review of Economic Dynamics
|July 24, 2012
Summary
Most retirees do not purchase annuities, defying standard economic models. This study reveals that bequest motives, or the desire to leave an inheritance, actually explain this behavior by making non-annuitization the optimal financial decision.
Area of Science:
- Behavioral Economics
- Retirement Planning
- Financial Decision-Making
Background:
- Standard economic theory struggles to explain why few retirees annuitize wealth.
- Bequest motives are often considered but are thought to predict partial annuitization, not complete avoidance.
Purpose of the Study:
- To investigate the role of bequest motives in explaining the low annuitization rates among retirees.
- To reconcile observed retirement wealth allocation with economic theory.
Main Methods:
- Theoretical analysis of forward-looking, expected utility-maximizing agents.
- Examination of financial decision-making under bequest motives at available annuity rates.
Main Results:
- Contrary to prevailing views, plausible bequest motives make non-annuitization the financially optimal choice for retirees.
- Individuals with strong bequest motives are likely better off avoiding annuities entirely.
Conclusions:
- Bequest motives are a key factor explaining the limited demand for annuities.
- Observed low annuitization rates are consistent with rational financial behavior driven by inheritance desires.
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