Is Life Annuity an Effective Tool for Managing Longevity Risk in Korea?

Abstract

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. © 2012 The Authors. Asian Economic Journal © 2012 East Asian Economic Association and Blackwell Publishing Pty Ltd.