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Optimal Annuity Purchase Decisions Under Uncertain Lifetime

  • Aparna Gupta
  • Zhisheng Li

    ()

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    This paper developed a wealth allocation framework for longevity risk protection under stochastic lifetime. By combining the dynamics of wealth evolution and health evolution in stochastic multi-period discrete-time models, an optimization problem was formulated with the objective of maximizing lifetime utility of consumption and bequest. We implemented the framework in different scenarios and provided results to illustrate the practical implications of the framework. Computational results suggested that it is optimal for most people to purchase an annuity at some point in their lives. However, an individual’s health status, risk aversion, retirement objective, and the insurance charge associated with annuities could significantly influence the choice of optimal annuitization time, consumption plans, and trade off between lifetime versus fixed-term annuity. Copyright Springer Science+Business Media New York 2013

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    File URL: http://hdl.handle.net/10.1007/s10834-012-9340-1
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    Article provided by Springer in its journal Journal of Family and Economic Issues.

    Volume (Year): 34 (2013)
    Issue (Month): 4 (December)
    Pages: 447-459

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    Handle: RePEc:kap:jfamec:v:34:y:2013:i:4:p:447-459
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=104904

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    1. 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.
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    15. Gong, Guan & Webb, Anthony, 2010. "Evaluating the Advanced Life Deferred Annuity -- An annuity people might actually buy," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 210-221, February.
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    17. 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.
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