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Heterogeneity in optimal investment and drawdown strategies in retirement

Adam Butt, Gaurav Khemka and Geoffrey J. Warren

Pacific-Basin Finance Journal, 2022, vol. 74, issue C

Abstract: We investigate optimal investment and drawdown strategies in retirement and show that the asset mix and drawdown strategy vary significantly with preferences and other retiree attributes. Loss aversion preferences lead to hedging strategies to secure the target consumption through use of immediate life and deferred life annuities, asset allocation and drawdown decisions. Risk aversion preferences lead to use of annuities to smooth and set a minimum level of consumption, with the strategies adopted varying with risk aversion. Welfare gains are more dependent on annuitisation decisions under loss aversion, and drawdown levels under risk aversion. A means-tested and government-provided Age Pension influences decisions of the risk averse but not the loss averse retiree.

Keywords: Retirement; Annuities; Utility functions; Optimisation; Dynamic programming (search for similar items in EconPapers)
JEL-codes: C61 D15 G11 H55 J32 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:74:y:2022:i:c:s0927538x22000932

DOI: 10.1016/j.pacfin.2022.101798

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Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

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