Optimal Annuity Risk Management

This paper studies the life-cycle consumption and portfolio choice problem taking account of annuity risk at retirement. The study allows for government-provided annuity income. Optimally, households allocate retirement wealth to nominal, inflation-linked and variable annuities, and condition this c...

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Bibliographic Details
Published inReview of finance Vol. 15; no. 4; pp. 799 - 833
Main Authors Koijen, Ralph S. J, Werker, Bas J. M, Nijman, Theo E
Format Journal Article
LanguageEnglish
Published Oxford University Press for European Finance Association 01.10.2011
SeriesReview of Finance
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Summary:This paper studies the life-cycle consumption and portfolio choice problem taking account of annuity risk at retirement. The study allows for government-provided annuity income. Optimally, households allocate retirement wealth to nominal, inflation-linked and variable annuities, and condition this choice on the state of the economy. The case in which there are limitations in the types of annuities that are available is also considered and the costs of annuity market incompleteness are quantified. Subsequently, the paper determines how investors optimally anticipate annuitization before retirement. The conclusion is that ignoring annuity risk before and at retirement can be economically costly. Copyright 2011, Oxford University Press.
ISSN:1572-3097
1875-824X
DOI:10.1093/rof/rfq006