Evaluating the Advanced Life Deferred Annuity - An Annuity people might actually buy

Anthony Webb, Center for Retirement Research at Boston College
Guan Gong, Shanghai University of Finance and Economics

Abstract

Although annuities provide longevity insurance that should be attractive to households facing an uncertain lifespan,rates of voluntary annuitization remain extremely low. We evaluate the Advanced Life Deferred Annuity, an annuity purchased at retirement, providing an income commencing in advanced old age. Using numerical optimization, we show that it would provide a substantial proportion of the longevity insurance provided by an immediate annuity, at much lower cost. At plausible levels of actuarial unfairness, households should prefer it to both immediate and postponed annuitization and an optimal decumulation of unannuitized wealth. Fewhouseholdswouldsuffersignificantlosseswereitusedasa 401(k)plandefault.