Less is more: increasing retirement gains by using an upside terminal wealth constraint

Catherine Donnelly (), Russell Gerrard (), Montserrat Guillen and Jens Perch Nielsen ()
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Catherine Donnelly: Department of Actuarial Mathematics and Statistics, and the Maxwell Institute for Mathematical Sciences, Heriot-Watt University
Russell Gerrard: Cass Business School, City University London
Jens Perch Nielsen: Cass Business School, City University London

No 2015-02, Working Papers from Universitat de Barcelona, UB Riskcenter

Abstract: We solve a portfolio selection problem of an investor with a deterministic savings plan who aims to have a target wealth value at retirement. The investor is an expected power utility-maximizer. The target wealth value is the maximum wealth that the investor can have at retirement. By constraining the investor to have no more than the target wealth at retirement, we find that the lower quantiles of the terminal wealth distribution increase, so the risk of poor financial outcomes is reduced. The drawback of the optimal strategy is that the possibility of gains above the target wealth are eliminated.

Keywords: Pension; Savings; Annuity; Investment; Retirement planning (search for similar items in EconPapers)
Pages: 21 pages
Date: 2015-02
New Economics Papers: this item is included in nep-age and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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http://www.ub.edu/rfa/research/WP/UBriskcenterWP201502.pdf First version, 2015 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bak:wpaper:201502

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