Optimal retirement planning with a focus on single and joint life annuities

Agnieszka Karolina Konicz Bell, David Pisinger, Alex Weissensteiner

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    Abstract

    We optimize the asset allocation, consumption and bequest decisions of a couple with an uncertain lifetime. The asset menu consists of zero coupon bonds and pure endowments with different maturities, whole life annuities and stocks. The pure endowments pay either fixed or variable benefits, and, similarly to the whole life annuities, are contingent on either a single or a joint lifetime. We model the stock returns and the parameters for the term structure with a vector autoregressive model, thus considering time-varying investment opportunities. To find the optimal solution we use a multi-stage stochastic programming approach, which allows for including complex surrender charges on pure endowments and annuities, as well as transaction costs on stocks and bonds. Our findings indicate that despite high surrender charges, households should invest in a wide combination of life contingent products with different maturities and underlying financial risk.
    Original languageEnglish
    JournalQuantitative Finance
    Volume16
    Issue number2
    Pages (from-to)275-295
    ISSN1469-7688
    DOIs
    Publication statusPublished - 2016

    Keywords

    • Finance
    • Economics, Econometrics and Finance (all)
    • Annuity
    • CRRA utility
    • Household
    • Stochastic programming
    • ASSET-LIABILITY MANAGEMENT
    • CONTRIBUTION PENSION-PLANS
    • DYNAMIC PORTFOLIO CHOICE
    • INDIVIDUAL ANNUITIES
    • TERM STRUCTURE
    • RISK-AVERSION
    • MODEL
    • ALLOCATION
    • INSURANCE
    • SELECTION

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