Wharton Pension Research Council Working Papers

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Working Paper

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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.

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© 2008 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


This research received support from the US Social Security Administration via the Michigan Retirement Research Center at the University of Michigan. Additional research support was provided by the FritzThyssen Foundation, the Deutscher Verein für Versicherungswissenschaft, and the Pension Research Council. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affliated. © 2008 Horneff, Maurer, Mitchell, Stamos. All rights reserved. All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council.

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Date Posted: 09 August 2019