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Heterogeneity in optimal investment and drawdown strategies in retirement

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  • Butt, Adam
  • Khemka, Gaurav
  • Warren, Geoffrey J.

Abstract

We investigate optimal investment and drawdown strategies in retirement and show that the asset mix and drawdown strategy vary significantly with preferences and other retiree attributes. Loss aversion preferences lead to hedging strategies to secure the target consumption through use of immediate life and deferred life annuities, asset allocation and drawdown decisions. Risk aversion preferences lead to use of annuities to smooth and set a minimum level of consumption, with the strategies adopted varying with risk aversion. Welfare gains are more dependent on annuitisation decisions under loss aversion, and drawdown levels under risk aversion. A means-tested and government-provided Age Pension influences decisions of the risk averse but not the loss averse retiree.

Suggested Citation

  • Butt, Adam & Khemka, Gaurav & Warren, Geoffrey J., 2022. "Heterogeneity in optimal investment and drawdown strategies in retirement," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
  • Handle: RePEc:eee:pacfin:v:74:y:2022:i:c:s0927538x22000932
    DOI: 10.1016/j.pacfin.2022.101798
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    More about this item

    Keywords

    Retirement; Annuities; Utility functions; Optimisation; Dynamic programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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