Annuitized Income and Optimal Asset Allocation

18 Pages Posted: 23 Sep 2017

See all articles by David Blanchett

David Blanchett

Morningstar Investment Management

Michael S. Finke

The American College

Date Written: September 22, 2017

Abstract

An investor who either buys an income annuity at retirement, or who has a higher level of guaranteed income through a pension or Social Security, should hold a different asset allocation than an investor who holds little guaranteed income. We use current annuity and bond prices to estimate optimal equity allocation for retirees with varying levels of guaranteed income who have higher and lower preference for income stability and bequests. We find that increasing annuitized income has a strong impact on optimal equity allocation. The average retiree will see their optimal equity allocation increase by roughly one percentage point for each percentage point increase in annuitized total wealth. Our results provide insight into prudent asset allocation recommendations for clients who haver higher levels of annuitized income.

Suggested Citation

Blanchett, David and Finke, Michael S., Annuitized Income and Optimal Asset Allocation (September 22, 2017). 2018 Academic Research Colloquium for Financial Planning and Related Disciplines, Available at SSRN: https://ssrn.com/abstract=3041717 or http://dx.doi.org/10.2139/ssrn.3041717

David Blanchett (Contact Author)

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States
859-492-5637 (Phone)

HOME PAGE: http://www.davidmblanchett.com

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

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