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 a retiree should purchase an irreversible life annuity, as a function of current annuity prices and mortality tables. Then, using the institutional characteristics of annuity markets in the US, we show that annuitization prior to age 65-70 is dominated by self-annuitization even in the absence of any bequest motives. And, for retirees who are willing to accept some financial risk in exchange for retaining the benefits of liquidity and bequest, the optimal age can be even later. In addition to the normative implications, these results should help shed light on the so-called annuity puzzle which has been much debated by economists, by focusing attention on the specific ages for which a puzzle can actually be said to exist.