Deferred Annuities and Strategic Asset Allocation

Authors

• Raimond H. Maurer

Abstract

 

We derive the optimal portfolio choice and consumption pattern over the lifecycle for households facing labor income, capital market, and mortality risk. In addition to stocks and bonds, households also have access to deferred annuities. Deferred annuities offer a hedge against mortality risk and provide similar benefits as Social Security. We show that a considerable fraction of wealth should be annuitized to skim the return enhancing mortality credit. The remaining liquid wealth (stocks and bonds) is used to hedge labor income risk during work life and to earn the equity premium. We find a marginal difference between a strategy involving deferred annuities and one where the investor can purchase immediate life annuities.

 

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Project

• UM08-24: The Impact of Social Security Benefits on Household Life Cycle Asset Allocation and Asset Location

Paper ID

WP 2008-178

Publication Type

Working Paper

Publication Year

2008