Subjective mortality, investment and annuitization over the financial life cycle
Seminar in Insurance and Economics
SPEAKER: Steven Haberman (Bayes Business School).
TITLE: Subjective mortality, investment and annuitization over the financial life cycle.
ABSTRACT: Evidence from panel surveys of households, collected over several years and in different countries, shows that people’s perception about their remaining lifetime deviates from actuarial data. This has consequences for consumption, savings and investment over an individual’s financial life cycle, and in particular for retirement planning and the purchase of annuities. We use data from the U.S. Survey of Consumer Finances to estimate subjective survival probabilities at different ages. This relies on two different methods of adjusting survival probabilities from a suitable life table. We implement a life-cycle model where individuals receive stochastic labour income and invest in a risk-free asset and in stocks whose returns may be imperfectly correlated with wages, and where individuals can annuitize their wealth at retirement. We demonstrate numerically that optimal annuitization, under the estimated subjective survival probabilities, is only slightly lower than optimal annuitization according to rational survival expectations. Subjective survival beliefs do not therefore fully explain the “annuity puzzle”, i.e. observed lower-than-optimal demand for annuities. This conclusion is robust to variations in risk and time preferences, in pre-retirement income profile, and in the loading factored by insurers in annuity prices.