Wharton Pension Research Council Working Papers

Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts

Wolfram J. Horneff, Goethe University
Raimond H. Maurer, Goethe University
Olivia S. Mitchell, The Wharton School, University of Pennsylvania
Michael Z. Stamos, Goethe University


This paper shows how lifelong survival-contingent payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations. Our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival-contingent payouts over the lifetime, and also asset allocation paths, showing how to invest in stocks versus bonds. We confirm that the investor will gradually move money out of her liquid saving into survivalcontingent assets to retirement and beyond, thereby enhancing her welfare by as much as 50 percent. The results are also robust to the introduction of uninsurable consumption shocks in housing expenses, income flows during the worklife and retirement, sudden changes in health status, and medical expenses.


Date Posted: 07 August 2019