Survey_HMMS_2007

Abstract

Specifically, we derive an optimal endogenous gradual annuitization strategy and asset allocation pattern for a risk-averse retiree facing stochastic lifetime and endowed with pension income. Our welfare analysis indicates that restricting retirees to simple phased withdrawal plans is distinctly suboptimal, such that they would have to be given up to 40 percent more initial wealth, to leave them as well off as with variable payout annuities. s. First, we endogenize the retiree’s annuitization (or asset location) decision, permitting her to dynamically and gradually buy variable payout annuities by drawing down her financial wealth during retirement. Accordingly, we do not force full annuitization, but rather we allow both partial and gradual annuitization and model variable payout annuities on an equal footing with stocks and bonds. Second, we optimize the asset allocation decision asset endogenously and dynamically, in both the non-annuitized financial portfolio and the variable payout annuity. Consequently, the retiree may rebalance her asset mix within the variable payout annuity optimally according to state variables, whereas prior work optimized only the initial buy and hold mix between equity-linked and constant annuities.