A buy-hold-sell pension saving strategy

Gaurav Khemka, Mogens Steffensen and Geoffrey J. Warren

Insurance: Mathematics and Economics, 2024, vol. 119, issue C, 1-16

Abstract: We propose a ‘buy, hold, sell’ (BHS) deterministic lifecycle strategy that involves buying and holding assets until they are sold to generate income. Savings are invested entirely into a risky portfolio until a pre-specified ‘switch age’ and then entirely into a risk-free portfolio after the switch age, followed by withdrawing during the payout phase from both portfolios based on annuitization factors that vary with age. We also allow for access to mortality credits through an insurance market. We analytically derive the dynamics of the investment strategy and show that the strategy is optimal for a range of investors with HARA risk preferences. We demonstrate numerically that the BHS strategy delivers limited loss of utility versus an optimal solution for investors with CRRA preferences and low-moderate levels of risk aversion while significantly outperforming deterministic strategies commonly seen in practice. The BHS strategy offers an attractive alternative for practical applications as it is straightforward to apply while avoiding the need for dynamic optimization and portfolio rebalancing.

Keywords: Lifecycle investing; Pensions; Retirement savings; Portfolio construction; Withdrawals (search for similar items in EconPapers)
JEL-codes: D15 G11 G51 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:119:y:2024:i:c:p:1-16

DOI: 10.1016/j.insmatheco.2024.07.003

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