Annuitization and Retirement Timing Decisions

This paper analyzes retirement timing decisions of DC pension plan members. In this paper the optimal annuitization timing decision is incorporated into the retirement timing decision. I …rst develop a retirement decision model and generate a forward looking retirement likelihood measure from this model. This measure describes the probability that an individual will retire within the next few years. In the model, the individual obtains utility from leisure, labor income before retirement and pension bene…t after retirement. The DC pension bene…t is the income from the annuity which is bought at the optimal time. The retirement likelihood measure is then tested with the English Longitudinal Study of Ageing (ELSA) data. From investigating the retirement decisions of the sample members in the second wave of ELSA, I conclude that the retirement likelihood measure is a good predictor of actual retirement decisions. Keywords: Retirement, Annuitization, Optimal Stopping Time JEL Classi…cation Codes: J26, G12 I thank Rik Frehen, Kai Li, Theo Nijman, Frank de Jong, Roel Mehlkopf, Bertrand Melenberg, Eytan Sheshinski, Jonathan Skinner, Bas Werker and seminar participants at Tilburg University, FMA European Meeting Doctoral Student Consortium (Prague) and Netspar Workshop in Den Haag for useful comments and discussions. yCentER, Netspar, and TILEC, Department of Finance, Tilburg University, Warandelaan 2, P.O. Box 90153, 5000 LE, Tilburg, the Netherlands. Email: [email protected].