 Choosing the optimal annuitization time post-retirementRussell Gerrard, Bjarne Højgaard and Elena Vigna Quantitative Finance, 2012, vol. 12, issue 7, 1143-1159 Abstract: In the context of decision making for retirees of a defined contribution pension scheme in the de-cumulation phase, we formulate and solve a problem of finding the optimal time of annuitization for a retiree having the possibility of choosing her own investment and consumption strategy. We formulate the problem as a combined stochastic control and optimal stopping problem. As criterion for the optimization we select a loss function that penalizes both the deviance of the running consumption rate from a desired consumption rate and the deviance of the final wealth at the time of annuitization from a desired target. We find closed-form solutions for the problem and show the existence of three possible types of solutions depending on the free parameters of the problem. In numerical applications we find the optimal wealth that triggers annuitization, compare it with the desired target and investigate its dependence on both parameters of the financial market and parameters linked to the risk attitude of the retiree. Simulations of the behaviour of the risky asset seem to show that, under typical situations, optimal annuitization should occur a few years after retirement. Date: 2012 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:12:y:2012:i:7:p:1143-1159 Ordering information: This journal article can be ordered from DOI: 10.1080/14697680903358248 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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