Designing Optimal Pension Payouts Using Life Annuities and Phased Withdrawals: A Portfolio Approach

Published: 2006
Project ID: UM06-11


This research project will evaluate the key risk and return trade-offs of alternative ways of handling the payout phase of a defined contribution or Social Security personal account. This project will compare these outcomes for a life annuity versus a phased withdrawal. The primary aim is to develop and explore the strengths and weaknesses of alternative approaches to pension drawdowns, taking into account uncertainty regarding the capital market, longevity, and the utility of bequests. The project will achieve this goal by constructing a model, optimizing simultaneously the proportion invested in life annuities, the withdrawal fraction, and the asset allocation for phased withdrawal. The project will inform policy by exploring alternative payout strategies from IRAs, 401(k) plans, and, possibly, Personal Retirement Accounts under a reformed Social Security system.


Raimond H. Maurer