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Deferred Annuities and Strategic Asset Allocation


  • Wolfram J. Horneff

    (Goethe University)

  • Raimond H. Maurer

    (Goethe University)


We derive the optimal portfolio choice and consumption pattern over the lifecycle for households facing labor income, capital market, and mortality risk. In addition to stocks and bonds, households also have access to deferred annuities. Deferred annuities offer a hedge against mortality risk and provide similar benefits as Social Security. We show that a considerable fraction of wealth should be annuitized to skim the return enhancing mortality credit. The remaining liquid wealth (stocks and bonds) is used to hedge labor income risk during work life and to earn the equity premium. We find a marginal difference between a strategy involving deferred annuities and one where the investor can purchase immediate life annuities.

Suggested Citation

  • Wolfram J. Horneff & Raimond H. Maurer, 2008. "Deferred Annuities and Strategic Asset Allocation," Working Papers wp178, University of Michigan, Michigan Retirement Research Center.
  • Handle: RePEc:mrr:papers:wp178

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    References listed on IDEAS

    1. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
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    6. Kingston, Geoffrey & Thorp, Susan, 2005. "Annuitization and asset allocation with HARA utility," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(03), pages 225-248, November.
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    Cited by:

    1. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.

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