Money in Motion: Dynamic Portfolio Choice in Retirement

34 Pages Posted: 15 Feb 2007

See all articles by Wolfram J. Horneff

Wolfram J. Horneff

Deka Investment

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Michael Z. Stamos

Allianz Global Investors

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2007

Abstract

Retirees confront the difficult problem of how to manage their money in retirement so as to not outlive their funds while continuing to invest in capital markets. We posit a dynamic utility maximizer who makes both asset location and allocation decisions when managing her retirement financial wealth and annuities, and we prove that she can benefit from both the equity premium and longevity insurance in her retirement portfolio. Even without bequests, she will not fully annuitize; rather, her optimal stock allocation amounts initially to more than half of her financial wealth and declines with age. Welfare gains from this strategy can amount to 40 percent of financial wealth (depending on risk parameters and other resources). In practice, it turns out that many retirees will do almost as well by purchasing a variable annuity invested 60/40 in stocks/bonds.

JEL Classification: G11, G23, G22, D14, J26, H55

Suggested Citation

Horneff, Wolfram J. and Maurer, Raimond and Mitchell, Olivia S. and Stamos, Michael Z., Money in Motion: Dynamic Portfolio Choice in Retirement (August 1, 2007). Pension Research Council Working Paper No. 2007-7, Michigan Retirement Research Center Research Paper No. WP 2007-152, 20th Australasian Finance & Banking Conference 2007 Paper, Available at SSRN: https://ssrn.com/abstract=962720 or http://dx.doi.org/10.2139/ssrn.962720

Wolfram J. Horneff (Contact Author)

Deka Investment ( email )

Hans-Bethe-Str. 11
Frankfurt, 60438
Germany
004915152529967 (Phone)

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Z. Stamos

Allianz Global Investors ( email )

Mainzer Landstrasse 11-13
Frankfurt, 60329
Germany

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