Optimal life cycle portfolio choice with variable annuities offering liquidity and investment downside protection

Vanya Horneff, Raimond Maurer, Olivia Mitchell and Ralph Rogalla

Insurance: Mathematics and Economics, 2015, vol. 63, issue C, 91-107

Abstract: This paper assesses optimal life cycle consumption and portfolio allocations when households have access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities over their adult lifetimes. Our contribution is to evaluate demand for these products which provide access to equity investments with money-back guarantees, longevity risk hedging, and partially-refundable premiums, in a realistic world with uncertain labor and capital market income as well as mortality risk. Others have predicted that consumers will only purchase such annuities late in life, but we show that they will optimally purchase GMWBs prior to retirement, consistent with their recent rapid uptick in sales. Additionally, many individuals optimally adjust their portfolios and consumption streams along the way by taking cash withdrawals from the products. These products can substantially enhance consumption, by up to 10% for those who experience highly unfavorable experiences in the stock market.

Keywords: Dynamic portfolio choice; Longevity risk; Variable annuity; Money-back guarantee; Liquidity; Retirement income (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 G22 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (35)

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Related works:
Working Paper: Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection (2013)
Working Paper: Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:63:y:2015:i:c:p:91-107

DOI: 10.1016/j.insmatheco.2015.03.031

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