Business Economics and Public Policy Papers

Author(s)

Vanya Horneff

Document Type

Journal Article

Date of this Version

7-2015

Publication Source

Insurance: Mathematics and Economics

Volume

63

Start Page

91

Last Page

107

DOI

10.1016/j.insmatheco.2015.03.031

Abstract

This paper assesses optimal life cycle consumption and portfolio allocations when households have access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities over their adult lifetimes. Our contribution is to evaluate demand for these products which provide access to equity investments with money-back guarantees, longevity risk hedging, and partially-refundable premiums, in a realistic world with uncertain labor and capital market income as well as mortality risk. Others have predicted that consumers will only purchase such annuities late in life, but we show that they will optimally purchase GMWBs prior to retirement, consistent with their recent rapid uptick in sales. Additionally, many individuals optimally adjust their portfolios and consumption streams along the way by taking cash withdrawals from the products. These products can substantially enhance consumption, by up to 10% for those who experience highly unfavorable experiences in the stock market.

Copyright/Permission Statement

© 2015. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

dynamic portfolio choice, longevity risk, variable annuity, money-back guarantee, liquidity, retirement income

Embargo Date

4-23-2017

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Date Posted: 27 November 2017

This document has been peer reviewed.