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Life-Cycle Asset Allocation with Annuity Markets: Is Longevity Insurance a Good Deal?

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  • Wolfram Horneff

    (Johann Wolfgang Goethe-University of Frankfort)

  • Raimond Maurer

    (Johann Wolfgang Goethe-University of Frankfort)

  • Michael Stamos

    (Johann Wolfgang Goethe-University of Frankfort)

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    Abstract

    We derive the optimal portfolio choice over the life-cycle for households facing labor income, capital market, and mortality risk. In addition to stocks and bonds, households also have access to incomplete annuity markets offering a hedge against mortality risk. We show that a considerable fraction of wealth should be annuitized to skim the return enhancing mortality credit. The remaining liquid wealth (stocks and bonds) is used to hedge labor income risk during work life, to earn the equity premium, and to ensure estate for the heirs. Furthermore, we assess the importance of common explanations for limited participation in annuity markets.

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    File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp146.pdf
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    Bibliographic Info

    Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp146.

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    Length: 45 pages
    Date of creation: Dec 2006
    Date of revision:
    Handle: RePEc:mrr:papers:wp146

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    Cited by:
    1. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2007. "Money in motion: Dynamic portfolio choice in retirement," CFS Working Paper Series 2007/21, Center for Financial Studies (CFS).
    2. Gaobo Pang, Mark J. Warshawsk, . "Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses," Research Reports 4, Watson Wyatt Worldwide.
    3. Gregorio Impavido & Esperanza Lasagabaster & Manuel Garcia-Huitron, 2010. "New Policies for Mandatory Defined Contribution Pensions : Industrial Organization Models and Investment Products," World Bank Publications, The World Bank, number 2462, February.
    4. Stamos, Michael Z., 2008. "Optimal consumption and portfolio choice for pooled annuity funds," Insurance: Mathematics and Economics, Elsevier, vol. 43(1), pages 56-68, August.
    5. Castaneda, Pablo, 2006. "Long Term Risk Assessment in a Defined Contribution Pension System," MPRA Paper 3347, University Library of Munich, Germany, revised 30 Apr 2007.
    6. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Dus, Ivica, 2008. "Following the rules: Integrating asset allocation and annuitization in retirement portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 396-408, February.

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