How a Pensioner Should Invest, Consume, Annuitise and Bequeath
Journal
Health and Ageing Newsletter, The Geneva Association, Risk & Insurance Economics
Type
journal article
Date Issued
2008-10-22
Author(s)
Abstract
The task of finding optimal consumption, asset allocation and the optimal annuitisation time for a pensioner leads to a combined optimal stopping and optimal control problem (COSOCP). In the no-bequest case it is optimal for the pensioner to annuitse immediately or never depending on the parameters of the model. However, there is an absurd strong tendency for the annuity market which can be eliminated with the inclusion of a bequest motive. Allowing for a bequest motive and consequently, for prior life insurance and a subsistence level of bequests, makes the optimisation problem technically quite involved and normally leads to a wealth-dependent annuitisation decision rule. The pensioner annuitises as soon as his wealth level falls below some threshold which exhibits a very natural parameter dependence. The main result is clearly that the essential inclusion of a bequest motive turns the very strong tendency for the annuity market into a slight tendency for the financial market. But even in the bequest case there are many realistic situations where the pensioner chooses the annuity market. This highlights the importance of longevity risk and, in combination with the intergenerational risk transfer argument discussed in Baumann and Müller (2008), it provides a legitimation for pension funds.
Language
English
HSG Classification
not classified
Refereed
No
Volume
October
Number
19
Start page
16
End page
18
Pages
3
Subject(s)
Division(s)
Eprints ID
48314
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Name
GA2008-Health19-Schiess.pdf
Size
176.7 KB
Format
Adobe PDF
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