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Life Annuitization: Why and how Much?

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  • Hainaut, Donatien
  • Devolder, Pierre

Abstract

This paper addresses some of the problems a majority of retired individuals face: Why and in what proportion should they invest in a life annuity to maximize the utility of their future consumption or a bequest? The market considered in this work is made up of three assets: a life annuity, a risky asset and a cash account. As this problem doesn’t accept any suitable explicit solution, it is numerically solved by the Markov Chain approximation developed by Kushner and Dupuis. Without a bequest motive, we observe that the optimal planning of consumption is divided into two periods and that optimal asset allocation should include the risky asset. Next, the influence of a bequest on consumption and investment pattern is developed. We demonstrate that even with a bequest motive, pensioners should allocate a part of their wealth to the purchase of life annuities.

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  • Hainaut, Donatien & Devolder, Pierre, 2006. "Life Annuitization: Why and how Much?," ASTIN Bulletin, Cambridge University Press, vol. 36(2), pages 629-654, November.
    • Handle: RePEc:cup:astinb:v:36:y:2006:i:02:p:629-654_01
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    Cited by:

    1. Shuanglan Li & Héloïse Labit Hardy & Michael Sherris & Andrés M. Villegas, 2022. "A Managed Volatility Investment Strategy for Pooled Annuity Products," Risks, MDPI, vol. 10(6), pages 1-30, June.
    2. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    3. Maria Alexandrova & Nadine Gatzert, 2019. "What Do We Know About Annuitization Decisions?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(1), pages 57-100, March.
    4. Thomas Post, 2009. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality," SFB 649 Discussion Papers SFB649DP2009-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    5. Bernhardt, Thomas & Donnelly, Catherine, 2019. "Modern tontine with bequest: Innovation in pooled annuity products," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 168-188.
    6. Mohamad Hassan Abou Daya & Carole Bernard, 2022. "What matters in the annuitization decision?," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-12, December.
    7. Griselda Deelstra & Pierre Devolder & Roberta Melis, 2021. "Optimal annuitisation in a deterministic financial environment," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 161-175, June.
    8. Hainaut, Donatien & Deelstra, Griselda, 2014. "Optimal timing for annuitization, based on jump diffusion fund and stochastic mortality," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 124-146.
    9. Thomas Bernhardt & Catherine Donnelly, 2019. "Modern tontine with bequest: innovation in pooled annuity products," Papers 1903.05990, arXiv.org.
    10. Lin He & Zongxia Liang & Sheng Wang, 2022. "Modern Tontine with Transaction Costs," Papers 2209.09709, arXiv.org, revised Jun 2023.

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