Optimal annuitisation in a deterministic financial environment

Griselda Deelstra (), Pierre Devolder () and Roberta Melis
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Griselda Deelstra: Université libre de Bruxelles
Pierre Devolder: Université Catholique de Louvain

Decisions in Economics and Finance, 2021, vol. 44, issue 1, No 10, 175 pages

Abstract: Abstract The global reforms to public pension schemes over the last thirty years have progressively reduced individuals’ post-retirement social security income. In order to compensate for this, individuals join pension funds and individual plans to increase their wealth at retirement. These types of fully funded plans generally give individuals the opportunity to withdraw the capital accumulated into their scheme or to convert it into an annuity. In this paper, we analyse individuals’ post-retirement choices to allocate the wealth at retirement between consumption, risk-free investments and a life annuity. We develop a discrete time optimisation model, in a deterministic framework, with a constant relative risk aversion (CRRA) utility function. We study the effect of a bequest motive and the annuity rate used by the insurer on the optimal choice. Several numerical applications are presented to illustrate the optimal annuitisation decision results and the optimal consumption paths.

Keywords: Post-retirement annuitisation; Utility function; Optimal consumption; 91B30; 91B16; 49L20; C61; D11; G22; J26 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10203-020-00316-5

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