Maximizing the utility of consumption with commutable life annuities
The purpose of this paper is to reveal the relation between commutability of life annuities and retirees’ willingness to annuitize. To this end, we assume the existence of commutable life annuities, whose surrender charge is a proportion of their actuarial value. We model a retiree as a utility-maximizing economic agent who can invest in a financial market with a risky and a riskless asset and who can purchase or surrender commutable life annuities. We define the wealth of an individual as the total value of her risky and riskless assets, which is required to be non-negative during her lifetime. We exclude the actuarial value of her annuity income in calculating wealth; therefore, we do not allow the individual to borrow from her future annuity income because this income is contingent on her being alive.
References listed on IDEAS
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.:
- Erhan Bayraktar & Xueying Hu & Virginia R. Young, 2010.
"Minimizing the Probability of Lifetime Ruin under Stochastic Volatility,"
1003.4216, arXiv.org, revised May 2011.
- Bayraktar, Erhan & Hu, Xueying & Young, Virginia R., 2011. "Minimizing the probability of lifetime ruin under stochastic volatility," Insurance: Mathematics and Economics, Elsevier, vol. 49(2), pages 194-206, September.
- Milevsky, Moshe A. & Young, Virginia R., 2007. "Annuitization and asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3138-3177, September.
- Jérôme Detemple & Angel Serrat, 2003. "Dynamic Equilibrium with Liquidity Constraints," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 597-629.
- Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
- Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005.
"Annuities and Individual Welfare,"
American Economic Review,
American Economic Association, vol. 95(5), pages 1573-1590, December.
- repec:spr:compst:v:51:y:2000:i:1:p:43-68 is not listed on IDEAS
- Shlomo Benartzi & Alessandro Previtero & Richard H. Thaler, 2011. "Annuitization Puzzles," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 143-64, Fall.
- Merton, Robert C., 1971.
"Optimum consumption and portfolio rules in a continuous-time model,"
Journal of Economic Theory,
Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Wang, Ting & Young, Virginia R., 2012. "Optimal commutable annuities to minimize the probability of lifetime ruin," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 200-216.
- Romuald Elie & Nizar Touzi, 2008. "Optimal lifetime consumption and investment under a drawdown constraint," Finance and Stochastics, Springer, vol. 12(3), pages 299-330, July.
- Moshe A. Milevsky & Kristen S. Moore & Virginia R. Young, 2006. "Asset Allocation And Annuity-Purchase Strategies To Minimize The Probability Of Financial Ruin," Mathematical Finance, Wiley Blackwell, vol. 16(4), pages 647-671.
- Dixit, Avinash, 1991. "A simplified treatment of the theory of optimal regulation of Brownian motion," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 657-673, October.
- He, Hua & Pages, Henri F, 1993. "Labor Income, Borrowing Constraints, and Equilibrium Asset Prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(4), pages 663-96, October.
- Hyeng Keun Koo, 1998. "Consumption and Portfolio Selection with Labor Income: A Continuous Time Approach," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 49-65.
- Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
- Lee Lockwood, 2012.
"Bequest Motives and the Annuity Puzzle,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
- Lee Lockwood, 2011. "Code files for "Bequest Motives and the Annuity Puzzle"," Computer Codes 10-110, Review of Economic Dynamics.
- Duffie, Darrell & Fleming, Wendell & Soner, H. Mete & Zariphopoulou, Thaleia, 1997. "Hedging in incomplete markets with HARA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 753-782, May.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:352-369. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.