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Is Life Annuity an Effective Tool for Managing Longevity Risk in Korea? *
Author(s) -
Yuh Yoonkyung,
Yang Jaehwan
Publication year - 2012
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/j.1467-8381.2011.02071.x
Subject(s) - annuity , longevity risk , life annuity , economics , actuarial science , longevity , bequest , retirement planning , risk aversion (psychology) , expected utility hypothesis , pension , financial economics , finance , political science , law , biology , genetics
We examine optimal life annuity planning for Korean pre‐retirees with a focus on the optimal timing of annuitization. The objective is to maximize the expected total utility from consumption during the retirement period. Benchmark cases with various values for net wealth, proportion of net wealth that is annuitized at the time of retirement and level of risk aversion are applied. We confirm that life annuity is an effective tool for managing longevity risk in Korea and it is important to select the timing of annuitization carefully to maximize the expected total utility and to avoid unnecessary financial ruin during retirement. In addition, we find that the optimal annuity strategy is more beneficial for those with lower levels of wealth than others.