Combined Accumulation- and Decumulation-Plans with Risk-Controlled Capital Protection

Peter Albrecht () and Carsten Weber ()
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Peter Albrecht: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim
Carsten Weber: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 03-09, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: We base our analysis on an investor, usually a retiree, endowed with a certain amount of wealth W, who considers both his own consumption needs (fixed periodic withdrawals) and the requirement of his heirs (defined bequest). For this purpose he pursues the following in-vestment strategy. The part F is invested in a set of investment funds with the target to achieve an accumulated wealth at the end of a certain time horizon of at least the original amount of wealth W (or the fraction ), measured in real terms. As certain investment risks are implied, we allow for the probability of falling short of the target and implement it into our model as a risk control parameter. The remaining part MM of the original wealth is invested in money market funds in order to avoid additional investment risks and deliver fixed periodic withdrawals until the end of the respective time horizon. The optimal investment strategy is the investment fund allocation that satisfies the probability of shortfall and mini-mizes F, while maximizing the fixed periodic withdrawals. We outline this investment prob-lem in a mathematical model and illustrate the solution for a reasonable choice of empirical parameters.

Pages: 11 pages
Date: 2003-05-14
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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