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Optimizing the equity-bond-annuity portfolio in retirement: The impact of uncertain health expenses

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  • Pang, Gaobo
  • Warshawsky, Mark

Abstract

This paper derives optimal equity-bond-annuity portfolios for retired households who face stochastic capital market returns, differential exposures to mortality risk and uncertain uninsured health expenses, and differential Social Security and defined benefit pension coverage. The results show that the health spending risk drives household portfolios to shift from risky equities to safer assets and enhances the demand for annuities due to their increasing-with-age superiority over bonds in hedging against life-contingent health spending and longevity risks. Households with higher income have a greater incremental demand for life annuities. The annuities in turn provide greater leverage for equity investment in the remaining asset portfolios.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 46 (2010)
Issue (Month): 1 (February)
Pages: 198-209

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Handle: RePEc:eee:insuma:v:46:y:2010:i:1:p:198-209

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Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords: Annuity Asset allocation Health expense Precautionary savings Pension Life cycle;

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References

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