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Optimal Annuity Risk Management

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Author Info

  • Ralph S. J. Koijen
  • Theo E. Nijman
  • Bas J. M. Werker

Abstract

This paper studies the life-cycle consumption and portfolio choice problem taking account of annuity risk at retirement. The study allows for government-provided annuity income. Optimally, households allocate retirement wealth to nominal, inflation-linked and variable annuities, and condition this choice on the state of the economy. The case in which there are limitations in the types of annuities that are available is also considered and the costs of annuity market incompleteness are quantified. Subsequently, the paper determines how investors optimally anticipate annuitization before retirement. The conclusion is that ignoring annuity risk before and at retirement can be economically costly. Copyright 2011, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 15 (2011)
Issue (Month): 4 ()
Pages: 799-833

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Handle: RePEc:oup:revfin:v:15:y:2011:i:4:p:799-833

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Cited by:
  1. Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2012. "Optimal life-cycle portfolios for heterogeneous workers," Carlo Alberto Notebooks 266, Collegio Carlo Alberto, revised 2013.
  2. Blake, David & Wright, Douglas & Zhang, Yumeng, 2011. "Age dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," MPRA Paper 34277, University Library of Munich, Germany.
  3. Aparna Gupta & Zhisheng Li, 2013. "Optimal Annuity Purchase Decisions Under Uncertain Lifetime," Journal of Family and Economic Issues, Springer, vol. 34(4), pages 447-459, December.
  4. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2011. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Public Care Aversion from Bequest Motives," Journal of Finance, American Finance Association, vol. 66(2), pages 519-561, 04.

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