Kapur, Sandeep and Orszag, J.M. (1999) A portfolio approach to investment and annuitization during retirement. Other. Birkbeck, University of London.
Abstract
We apply Merton(1969) to the investment allocation decision of individuals in retirement who can invest in both equities and annuities. We derive optimal switching rules between equities and annuities during retirement. Our model predicts a critical age at which an individual ceases to hold any equity. This age does not depend on the volatility of markets nor on the risk aversion of individuals, only on the difference between the equity premium and the annuity premium, the excess return to annuities because of cohort mortality. While the cross-over age does not depend on relative risk aversion, the speed of approach to the cross-over age does depend on relative risk aversion. The bequest motive influences both the level of consumption and the share of equity. Our results suggest a maximal annuitization age should be flexible as mortality improves. The UK’s maximum annuitization age of 75 years appears at least five years too low given current mortality experience. We also calculate welfare losses from mandatory annuitization at earlier ages and find that consumer detriment can be substantial. For moderate levels of risk aversion, a typical individual annuitizing at age 60 can experience declines in risk-adjusted monetary value of up to 20% relative to an optimal portfolio.
Metadata
| Item Type: | Monograph (Other) |
|---|---|
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Sarah Hall |
| Date Deposited: | 14 Jul 2020 14:00 |
| Last Modified: | 02 Aug 2023 18:01 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/32558 |
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