Optimal Annuitization with stochastic mortality: Piecewise Deterministic Mortality Force

Matteo Buttarazzi, Tiziano De Angelis and Gabriele Stabile

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Abstract: This paper addresses the problem of determining the optimal time for an individual to convert retirement savings into a lifetime annuity. The individual invests their wealth into a dividend-paying fund that follows the dynamics of a geometric Brownian motion, exposing them to market risk. At the same time, they face an uncertain lifespan influenced by a stochastic mortality force. The latter is modelled as a piecewise deterministic Markov process (PDMP), which captures sudden and unpredictable changes in the individual's mortality force. The individual aims to maximise expected lifetime linear utility from consumption and bequest, balancing market risk and longevity risk under an irreversible, all-or-nothing annuitization decision. The problem is formulated as a three-dimensional optimal stopping problem and, by exploiting the PDMP structure, it is reduced to a sequence of nested one-dimensional problems. We solve the optimal stopping problem and find a rich structure for the optimal annuitization rule, which cover all parameter specifications. Our theoretical analysis is complemented by a numerical example illustrating the impact of a single health shock on annuitization timing, along with a sensitivity analysis of key model parameters.

Date: 2025-09
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