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

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Author Info
Wolfram Horneff (Johann Wolfgang Goethe-University of Frankfort)
Raimond Maurer (Johann Wolfgang Goethe-University of Frankfort)
Michael Stamos (Johann Wolfgang Goethe-University of Frankfort)
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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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
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Handle: RePEc:mrr:papers:wp146

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wolfram Horneff & Raimond Maurer & Michael Stamos, 2008. "Optimal Gradual Annuitization: Quantifying the Costs of Switching to Annuities," Working Paper Series: Finance and Accounting 174, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  2. 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. [Downloadable!]
  3. Wolfram J. Horneff & Raimond H. Maurer & Olivia S. Mitchell & Michael Z. Stamos, 2007. "Money in Motion: Dynamic Portfolio Choice in Retirement," NBER Working Papers 12942, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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