Optimal allocation to deferred income annuities

DOI10.1016/J.INSMATHECO.2019.05.001zbMATH Open1431.91333arXiv2111.01234OpenAlexW2964713671MaRDI QIDQ2292184FDOQ2292184

Authors: Yanyan Li 

Publication date: 3 February 2020

Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)

Abstract: In this paper we employ a lifecycle model that uses utility of consumption and bequest to determine an optimal Deferred Income Annuity (DIA) purchase policy. We lay out a mathematical framework to formalize the optimization process. The method and implementation of the optimization is explained, and the results are then analyzed. We extend our model to control for asset allocation and show how the purchase policy changes when one is allowed to vary asset allocation. Our results indicate that (i.) refundable DIAs are less appealing than non-refundable DIAs because of the loss of mortality credits; (ii.) the DIA allocation region is larger under the fixed asset allocation strategy due to it becoming a proxy for fixed-income allocation; and (iii.) when the investor is allowed to change asset-allocation, DIA allocation becomes less appealing. However, a case for higher DIA allocation can be made for those individuals who perceive their longevity to be higher than the population.

Full work available at URL: https://arxiv.org/abs/2111.01234

Recommendations

• Optimal purchasing of deferred income annuities when payout yields are mean-reverting
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• Optimal asset allocation in life annuities: a note.

zbMATH Keywords

asset allocationstochastic optimal controlconsumptionretirement incomedeferred income annuities

Mathematics Subject Classification ID

Actuarial mathematics (91G05) Optimal stochastic control (93E20)

Cites Work

• Optimum consumption and portfolio rules in a continuous-time model
• Annuitization and asset allocation
• Optimal investment
• ASSET ALLOCATION AND ANNUITY-PURCHASE STRATEGIES TO MINIMIZE THE PROBABILITY OF FINANCIAL RUIN
• The Calculus of Retirement Income
• Optimal Annuity Risk Management*
• Optimal timing for annuitization, based on jump diffusion fund and stochastic mortality
• Optimal purchasing of deferred income annuities when payout yields are mean-reverting

Cited In (8)

• Optimal investment-disinvestment choices in health-dependent variable annuity
• Optimal Annuity Risk Management*
• Integrating optimal annuity planning with consumption-investment selections in retirement planning
• Optimal investment for a retirement plan with deferred annuities
• Refundable income annuities: feasibility of money-back guarantees
• Optimal investment for a retirement plan with deferred annuities allowing for inflation and labour income risk
• Optimal asset allocation in life annuities: a note.
• Optimal purchasing of deferred income annuities when payout yields are mean-reverting

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