Money in motion: dynamic portfolio choice in retirement

  • Retirees confront the difficult problem of how to manage their money in retirement so as to not outlive their funds while continuing to invest in capital markets. We posit a dynamic utility maximizer who makes both asset location and allocation decisions when managing her retirement financial wealth and annuities, and we prove that she can benefit from both the equity premium and longevity insurance in her retirement portfolio. Even without bequests, she will not fully annuitize; rather, her optimal stock allocation amounts initially to more than half of her financial wealth and declines with age. Welfare gains from this strategy can amount to 40 percent of financial wealth (depending on risk parameters and other resources). In practice, it turns out that many retirees will do almost as well by purchasing a variable annuity invested 60/40 in stocks/bonds. JEL Classification: G11, G23, G22, D14, J26, H55

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Author:Wolfram J. Horneff, Raimond MaurerGND, Olivia S. MitchellORCiDGND, Michael Z. Stamos
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2007,21
Series (Serial Number):CFS working paper series (2007, 21)
Document Type:Working Paper
Year of Completion:2007
Year of first Publication:2007
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2007/05/29
Tag:insurance; personal finance; portfolio choice; private financial services; retirement policies; social security
GND Keyword:Portfolio Selection; Portfoliomanagement
Issue:May 2007
Page Number:34
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht