New Evidence on Annuity Choices in Chile: A Dynamic Programming Approach


To analyze the empirical determinants of Chilean workers’ decision to annuitize at retirement or not.


The goal of this project is to analyze the empirical determinants of workers’ decision to annuitize or not at retirement, in Chile. An important decision that older people must consider pertains to how they should manage the decumulation process for their retirement assets. One option in the Chilean case is to purchase an annuity that provides a stream of income for the length of purchaser’s life, which requires transferring the funds to an insurance company. This protects the retiree from longevity risk, but the decision to annuitize is irreversible and there generally are no funds available to bequeath to one’s heirs. An alternative option would be to implement a phased withdrawal plan, where the retiree would retain control over his funds and draw down a particular amount each year until the funds are exhausted. In this second case, the retiree retains longevity risk and bears capital market risk associated with the investment performance. Our project seeks to understand the factors that help explain why some people buy annuities and others take phased withdrawals. Using dynamic programming models, we will measure the benefits associated with access to an annuity market in the Chilean case.

Funded By: 
Funded By: 
Award Dates: 
July 1, 2008 - June 30, 2009
PARC Grant Year: 
Year 15