Wharton Pension Research Council Working Papers

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Working Paper

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This paper examines variable annuities (VA) that include a guaranteed minimum withdrawal lifetime benefit (GWLB). For a risk-averse retiree, we show that the basic VA/GWLB is unlikely to induce systematic withdrawals early in retirement, while it also provides useful protection in the case of extreme longevity. The typical VA/GWLB increases utility compared to not annuitizing, though its money’s worth ratio is slightly lower than not annuitizing. The individual’s portfolio mix elected within the VA has the greatest impact on the valuation of the product, mattering much more than fees or mortality. Having a GWLB prompts riskier portfolio choices up to the point where insurers must restrict the risky share so as to protect solvency.

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The researchers acknowledge support from the Boettner Center/Pension Research Council at The Wharton School of the University of Pennsylvania, and the TIAA-CREF Institute. They also appreciate comments provided by Benny Goodman, Michael Heller, Alexander Kling, Christian Knoller, Raimond Maurer, Richard Peter, David Richardson, and Stephen Utkus, though opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated. © 2012 Steinorth and Mitchell. All rights reserved.

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Date Posted: 28 June 2019