Variable Payout Annuities and Dynamic Portfolio Choice in Retirement

Journal of Pension Economics and Finance, 2009

Posted: 31 Mar 2009

See all articles by Wolfram J. Horneff

Wolfram J. Horneff

Goethe University Frankfurt - Department of Finance

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

Date Written: March, 29 2009

Abstract

Many retirees hope to continue earning capital market rewards on their saving while avoiding outliving their funds during retirement. We model a dynamic utility maximizing investor who seeks to benefit from holding both equity and longevity insurance. She is free to adjust her portfolio allocation of her financial wealth as well as of the annuity over time, and she can purchase variable payout annuities any time and incrementally. In this setting, we show that the retiree will not fully annuitize even without bequests; rather, she will combine variable annuities with withdrawals from her liquid financial wealth so as to match her desired consumption profile. Optimal stock exposures decrease over time, both within the variable annuity and the withdrawal plan. Welfare gains from this strategy can amount to 40% of financial wealth, depending on risk parameters and other resources; additionally, many retirees will do almost as well as the fully optimized outcome if they hold variable annuities invested 60/40 in stocks/bonds.

Suggested Citation

Horneff, Wolfram and Maurer, Raimond and Mitchell, Olivia S. and Stamos, Michael Z., Variable Payout Annuities and Dynamic Portfolio Choice in Retirement (March, 29 2009). Journal of Pension Economics and Finance, 2009, Available at SSRN: https://ssrn.com/abstract=1369997

Wolfram Horneff

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Gr├╝neburgplatz 1
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 (Contact Author)

Allianz Global Investors ( email )

Mainzer Landstrasse 11-13
Frankfurt, 60329
Germany

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