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Optimal annuitisation in a deterministic financial environment

Author

Listed:
  • Griselda Deelstra

    (Université libre de Bruxelles)

  • Pierre Devolder

    (Université Catholique de Louvain)

  • Roberta Melis

    (Universitas Mercatorum)

Abstract

The global reforms to public pension schemes over the last thirty years have progressively reduced individuals’ post-retirement social security income. In order to compensate for this, individuals join pension funds and individual plans to increase their wealth at retirement. These types of fully funded plans generally give individuals the opportunity to withdraw the capital accumulated into their scheme or to convert it into an annuity. In this paper, we analyse individuals’ post-retirement choices to allocate the wealth at retirement between consumption, risk-free investments and a life annuity. We develop a discrete time optimisation model, in a deterministic framework, with a constant relative risk aversion (CRRA) utility function. We study the effect of a bequest motive and the annuity rate used by the insurer on the optimal choice. Several numerical applications are presented to illustrate the optimal annuitisation decision results and the optimal consumption paths.

Suggested Citation

  • Griselda Deelstra & Pierre Devolder & Roberta Melis, 2021. "Optimal annuitisation in a deterministic financial environment," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 161-175, June.
    • Handle: RePEc:spr:decfin:v:44:y:2021:i:1:d:10.1007_s10203-020-00316-5
    DOI: 10.1007/s10203-020-00316-5
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