Wharton Pension Research Council Working Papers

Document Type

Working Paper

Date of this Version



Retirees must draw down their accumulated assets in an orderly fashion so as not to exhaust their funds too soon. We derive the optimal retirement portfolio from a menu that includes payout annuities as well as an investment allocation and a withdrawal strategy, assuming risk aversion, stochastic capital markets, and uncertain lifetimes. The resulting portfolio allocation, when fixed as of retirement, is then compared to phased withdrawal strategies such a “self-annuitization” plan or the 401(k) “default” pattern encouraged under US tax law. Surprisingly, the fixed percentage approach proves appealing for retirees across a wide range of risk preferences, supporting financial planning advisors who often recommend this rule. We then permit the retiree to switch to an annuity later, which gives her the chance to invest in the capital market and “bet on death.” As risk aversion rises, annuities first crowd out bonds in retiree portfolios; at higher risk aversion still, annuities replace equities in the portfolio. Making annuitization compulsory can also lead to substantial utility losses for less risk-averse investors.


insurance, pensions, retirement and retirement policies, social security and public pensions

JEL Code

G22, G23, J26, J32, H55

Working Paper Number


Copyright/Permission Statement

© 2006 Horneff, Maurer, Mitchell, and Dus. All Rights Reserved.


This research was conducted with support from the Social Security Administration via the Michigan Retirement Research Center at the University of Michigan under subcontract to the Johann Wolfgang Goethe-University of Frankfurt and a TIAA-CREF Institute grant to the National Bureau of Economic Research. Additional support was provided by the Pension Research Council at The Wharton School of the University of Pennsylvania, the FritzThyssen Foundation. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated. This is part of the NBER Program on the Economics of Aging.

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Economics Commons



Date Posted: 28 August 2019