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Dynamic portfolio choice with deferred annuities

  • Horneff, Wolfram
  • Maurer, Raimond
  • Rogalla, Ralph
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    We derive the optimal life-cycle portfolio choice and consumption pattern for households facing uncertain labor income, risky capital market, and mortality risk. In addition to stocks and bonds, the households have access to deferred annuities. Deferred payout life annuities are financial contracts providing life-long income to the annuitant after a specified period of time conditional on survival. We find that deferred annuities play an important role in household portfolios and generate significant welfare gains. Households with high benefits from state pensions, moderate risk aversion and moderate labor income risk purchase deferred annuities from age 40 and gradually increase their portfolio share. At retirement, deferred annuities account for 78% of total financial wealth. Households with low state pensions and high labor income risk purchase more annuities and earlier. Uncertainty with respect to future mortality rates has the same effect, i.e. household hedge against longevity risks using deferred annuities.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 11 (November)
    Pages: 2652-2664

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:11:p:2652-2664
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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