Flexible Retirement with Annuity Income the Best Alternative

June 17, 2009 (PLANSPONSOR.com) - The best-case scenario for older workers is to let them decide when to wind down their work lives as well as to introduce annuities into their financial picture to give them the flexibility to retire earlier and participate more vigorously in the investment markets.

That was a key conclusion of a research paper prepared for the National Bureau of Economic Research by German researchers Jingjing Chai, Wolfram Horneff and Raimond Maurer, and Olivia S. Mitchell of the University of Pennsylvania’s Wharton School. Earlier retirement becomes more possible when workers have both Social Security benefits and annuity payments on which to rely, the researchers assert.

The economic analysis of several retirement/investment scenarios showed the flexible retirement age with annuitized savings produces a 7% economic gain which is more than 60% of first-year earnings, according to the report.”Our model with an age-dependent leisure preference parameter fits observed behavior remarkably well, incorporating a gradual decline in work hours and equity holdings with age, as well as sensible dispersion in retirement ages which peak at age 62, consistent with the evidence,” the researchers wrote.

The researchers predict that fixed-payout annuities will gradually be replaced more by investment-linked annuities as Baby Boomers move towards retirement.

“Evidently, combining work, investment, and lifetime payouts offers better and more attractive ways to manage life’s many challenges,” commented the researchers. “In sum, the marginal benefit from having access to annuities is positive and important in the life cycle context, as is labor market flexibility in the form of adjustable weekly hours of work and retirement age.”

The report said the study's statistical analysis looked at three scenarios:

  • a moderately risk-averse worker whose chooses her appropriate consumption, investment, and labor supply strategy given a fixed work week but able to select a retirement age;
  • a household that can also choose its work intensity in the pre-retirement period, where the maximal labor supply is 2/3 of available time; equivalent to a maximum of 75 working hours per week; and
  • a household not only able to select work intensity and retirement age, but also to hold annuities as well as stocks and bonds.

The report can be ordered here .