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Optimal annuity risk management

Journal

Review of Finance

Subject

Finance

Publishing details

Review of Finance 2011 Vol 15:4 p 799-833

Authors / Editors

Koijen RSJ;Nijman TE;Werker BJM

Publication Year

2011

Abstract

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.

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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