A Buy-Hold-Sell Pension Saving Strategy

27 Pages Posted: 24 Jul 2023

See all articles by Gaurav Khemka

Gaurav Khemka

Australian National University (ANU)

Mogens Steffensen

University of Copenhagen

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics; The Conexus Institute

Abstract

We propose a ‘buy, hold, sell’ (BHS) deterministic lifecycle strategy that involves buying and holding assets until they are sold to generate income. Savings are invested entirely into a risky portfolio until a pre-specified ‘switch age’ and then entirely into a risk-free portfolio after the switch age, followed by withdrawing during the payout phase from both portfolios based on annuitization factors that vary with age. We also allow for access to mortality credits through an insurance market. We analytically derive the dynamics of the investment strategy and show that the strategy is optimal for a range of investors with HARA risk preferences. We demonstrate numerically that the BHS strategy delivers limited loss of utility versus an optimal solution for investors with CRRA preferences and low-moderate levels of risk aversion while significantly outperforming deterministic strategies commonly seen in practice. The BHS strategy offers an attractive alternative for practical applications as it is straightforward to apply while avoiding the need for dynamic optimization and portfolio rebalancing.

Keywords: Lifecycle investing, pensions, retirement savings, portfolio construction, withdrawals

Suggested Citation

Khemka, Gaurav and Steffensen, Mogens and Warren, Geoffrey J., A Buy-Hold-Sell Pension Saving Strategy. Available at SSRN: https://ssrn.com/abstract=4519652 or http://dx.doi.org/10.2139/ssrn.4519652

Gaurav Khemka (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Mogens Steffensen

University of Copenhagen ( email )

Universitetsparken 5
DK-2100 Copenhagen
Denmark

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

The Conexus Institute ( email )

Sydney, NSW, 2000
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
74
Abstract Views
299
Rank
685,458
PlumX Metrics