Life-Cycle Asset Allocation with Annuity Markets: Is Longevity Insurance a Good Deal?
We derive the optimal portfolio choice over the life-cycle for households facing labor income, capital market, and mortality risk. In addition to stocks and bonds, households also have access to incomplete annuity markets offering a hedge against mortality risk. 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, to earn the equity premium, and to ensure estate for the heirs. Furthermore, we assess the importance of common explanations for limited participation in annuity markets.
This MRRC working paper was subsequently published as:
Vijan, Sandeep, Hayward, Rodney and Langa, Kenneth "The impact of diabetes on workforce participation: results from a national household sample." (2004) Health Services Research 39(6):1653-1670.
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- UM06-11: Designing Optimal Pension Payouts Using Life Annuities and Phased Withdrawals: A Portfolio Approach
Paper IDWP 2006-146