Optimal Retirement Plan Design: Variable Annuities with Lifetime Income Guarantees and Investment Downside Protection

Published: 2013
Project ID: UM13-Q3


When financially inexperienced consumers must manage their self-directed retirement accounts, they may fail to understand investment and longevity risk. This problem can be rectified if defined contribution plans include variable deferred annuities with lifetime income guarantees and investment downside protection. We evaluate the life cycle economic consequences for consumption and portfolio allocation patterns resulting from including such annuities in the pension portfolio. Under reasonable parameter assumptions, these products are expected to enhance older retirees’ consumption and generate welfare gains.