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Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection

  • Vanya Horneff
  • Raimond Maurer
  • Olivia S. Mitchell
  • Ralph Rogalla

We evaluate lifecycle consumption and portfolio allocation patterns resulting from access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities, one of the most rapidly-growing financial innovations over the last two decades. A key feature of these products is that they offer access to equity investments with downside protection, hedging of longevity risk, and partially-refundable premiums. Welfare rises since policyholders exercise the product's flexibility by taking withdrawals and dynamically adjusting their portfolios and consumption streams. Consistent with observed behavior, differences across individuals' cash out and annuitization patterns result from variations in realized equity market returns and labor income trajectories.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19206.

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Date of creation: Jul 2013
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Publication status: published as Insurance: Mathematics and Economics Volume 63, July 2015, Pages 91–107 Special Issue: Longevity Nine - the Ninth International Longevity Risk and Capital Markets Solutions Conference Cover image Optimal life cycle portfolio choice with variable annuities offering liquidity and investment downside protection Vanya Horneffa, , Raimond Maurera, , , Olivia S. Mitchellb, , Ralph Rogallaa,
Handle: RePEc:nbr:nberwo:19206
Note: AG LS
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