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Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts

Author

Listed:
  • Wolfram J. Horneff

    (Goethe University)

  • Raimond H. Maurer

    (Goethe University)

  • Olivia S. Mitchel

    (The Wharton School)

  • Michael Z. Stamos

    (Goethe University)

Abstract

This paper shows how lifelong survival-contingent payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations. Our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival-contingent payouts over the lifetime, and also asset allocation paths, showing how to invest in stocks versus bonds. We conrm that the investor will gradually move money out of her liquid saving into survivalcontingent assets to retirement and beyond, thereby enhancing her welfare by as much as 50 percent. The results are also robust to the introduction of uninsurable consumption shocks in housing expenses, income flows during the worklife and retirement, sudden changes in health status, and medical expenses.

Suggested Citation

  • Wolfram J. Horneff & Raimond H. Maurer & Olivia S. Mitchel & Michael Z. Stamos, 2008. "Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts," Working Papers wp177, University of Michigan, Michigan Retirement Research Center.
  • Handle: RePEc:mrr:papers:wp177
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    File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp177.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jingjing Chai & Wolfram Horneff & Raimond Maurer & Olivia S. Mitchell, 2009. "Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts," Working Papers wp204, University of Michigan, Michigan Retirement Research Center.
    2. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, vol. 157(4), pages 359-416, December.

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