Post by Sapphire Capital on Nov 6, 2008 22:38:27 GMT 4
Deferred Annuities and Strategic Asset Allocation
Wolfram J. Horneff
Goethe University Frankfurt - Department of Finance
Raimond Maurer
University of Frankfurt - Faculty of Business and Economics
September 01, 2008
Michigan Retirement Research Center Research Paper No. 2008-178
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1286134_code908624.pdf?abstractid=1286134&mirid=3
Wolfram J. Horneff
Goethe University Frankfurt - Department of Finance
Raimond Maurer
University of Frankfurt - Faculty of Business and Economics
September 01, 2008
Michigan Retirement Research Center Research Paper No. 2008-178
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1286134_code908624.pdf?abstractid=1286134&mirid=3