Heterogeneity in optimal investment and drawdown strategies in retirement
Posted: 20 Jan 2021 Last revised: 27 Jun 2022
Date Written: 2022
Abstract
We investigate optimal investment and drawdown strategies in retirement and show that the asset mix and drawdown strategy vary significantly with preferences and other retiree attributes. Loss aversion preferences lead to hedging strategies to secure the target consumption through use of immediate life and deferred life annuities, asset allocation and drawdown decisions. Risk aversion preferences lead to use of annuities to smooth and set a minimum level of consumption, with the strategies adopted varying with risk aversion. Welfare gains are more dependent on annuitisation decisions under loss aversion, and drawdown levels under risk aversion. A means-tested and government-provided Age Pension influences decisions of the risk averse but not the loss averse retiree.
Keywords: Retirement, Annuities, Utility Functions, Optimisation, Dynamic Programming
JEL Classification: C61, D15, G11, H55, J32
Suggested Citation: Suggested Citation
Adam Butt (Contact Author)
Australian National University - Research School of Finance, Actuarial Studies & Statistics ( email )
Canberra, Australian Capital Territory 2601
Australia
Geoffrey J. Warren
Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )
CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia