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Self-Annuitization, Ruin Risk in Retirement and Asset Allocation: The Annuity Benchmark

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Author Info

  • Albrecht, Peter

    () (Sonderforschungsbereich 504)

  • Maurer, Raimond

    () (Lehrstuhl fuer Investment, Portfolio Management und Alterssicherung)

Abstract

The present paper considers a retiree of a certain age with an initial endowment of investable wealth facing the following alternative investment opportunities. One possibility is to buy a single premium immediate annuity-contract. This insurance contract pays a life-long constant pension payment of a certain amount, depending e.g. on the age of the retiree, the operating cost of the insurance company and the return the company is able to realize from its investments. The alternative possibility is to invest the single premium into a portfolio of mutual funds and to periodically withdraw a fixed amount, in the present paper chosen to be equivalent to the consumption stream generated by the annuity . The particular advantage of this self annuitization strategy compared to the life annuity is its greater liquidity. However, the risk of the second opportunity is to outlive the income stream generated by this investment. The risk in this sense is specified by considering the probability of running out of money before the uncertain date of death. The determination of this personal ruin probability with respect to German mortality and capital market conditions is the objective of the following paper.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 01-35.

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Length: 19 pages
Date of creation: 01 Jun 2001
Date of revision:
Handle: RePEc:xrs:sfbmaa:01-35

Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Cited by:
  1. Olivia S. Mitchell & David McCarthy, 2002. "Annuities for an Ageing World," CeRP Working Papers 21, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  2. Raimond Maurer, 2003. "Institutional Investors in Germany: Insurance Companies and Investment Funds," CFS Working Paper Series 2003/14, Center for Financial Studies.
  3. Thomas Post & Helmut Gründl & Hato Schmeiser, 2006. "Portfolio management and retirement: what is the best arrangement for a family?," Financial Markets and Portfolio Management, Springer, vol. 20(3), pages 265-285, September.
  4. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2003. "Pensionmetrics 2: stochastic pension plan design during the distribution phase," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 29-47, August.
  5. Thaut, Michael, 2003. "Die individuelle Vorteilhaftigkeit der privaten Rentenversicherung: Steuervorteile, Lebenserwartung und Stornorisiken," Tübinger Diskussionsbeiträge 264, University of Tübingen, School of Business and Economics.
  6. Huaxiong Huang & Moshe A. Milevsky & Thomas S. Salisbury, 2012. "Valuation and hedging of the ruin-contingent life annuity (RCLA)," Papers 1205.3686, arXiv.org.
  7. Raimond Maurer & Barbara Kaschützke (geb. Somova), 2005. "The German Insurance Industry: Market Overview and Trends," Working Paper Series: Finance and Accounting 156, Department of Finance, Goethe University Frankfurt am Main.
  8. Wei Sun & Robert K. Triest & Anthony Webb, 2007. "Optimal retirement asset decumulation strategies: the impact of housing wealth," Public Policy Discussion Paper 07-2, Federal Reserve Bank of Boston.
  9. Ivica Dus & Raimond Maurer & Olivia S. Mitchell, 2005. "Betting on Death and Capital Markets in Retirement: A Shortfall Risk Analysis of Life Annuities," NBER Working Papers 11271, National Bureau of Economic Research, Inc.
  10. Ivica Dus & Raimond Maurer & Olivia S. Mitchell, 2003. "Betting on Death and Capital Markets in Retirement: A Shortfall Risk Analysis of Life Annuities versus Phased Withdrawal Plans," Working Papers wp063, University of Michigan, Michigan Retirement Research Center.
  11. Wolfram J. Horneff & Raimond Maurer & Olivia S. Mitchell & Ivica Dus, 2006. "Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion," NBER Working Papers 12392, National Bureau of Economic Research, Inc.
  12. Marina Di Giacinto & Bjarne Højgaard & Elena Vigna, 2010. "Optimal time of annuitization in the decumulation phase of a defined contribution pension scheme," Working Papers 2010-08, Universita' di Cassino, Dipartimento di Scienze Economiche.
  13. Russell Gerrard & Bjarne Højgaard & Elena Vigna, 2008. "Choosing the Optimal Annuitization Time Post Retirement," Carlo Alberto Notebooks 76, Collegio Carlo Alberto.
  14. Marina Di Giacinto & Salvatore Federico & Fausto Gozzi & Elena Vigna, 2012. "Income drawdown option with minimum guarantee," Carlo Alberto Notebooks 272, Collegio Carlo Alberto.

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