Wharton Pension Research Council Working Papers

Document Type

Working Paper

Date of this Version



Retirees confront the difficult problem of how to manage their money in retirement so as to not outlive their funds while continuing to invest in capital markets. We posit a dynamic utility maximizer who makes both asset location and allocation decisions when managing her retirement financial wealth and annuities, and we prove that she can benefit from both the equity premium and longevity insurance in her retirement portfolio. Even without bequests, she will not fully annuitize; rather, her optimal stock allocation amounts initially to more than half of her financial wealth and declines with age. Welfare gains from this strategy can amount to 40 percent of financial wealth (depending on risk parameters and other resources). In practice, it turns out that many retirees will do almost as well by purchasing a variable annuity invested 60/40 in stocks/bonds.


portfolio choice, private financial services, insurance, personal finance, retirement policies, social security

JEL Code

G11, G22, G23, D14, J26, H55

Working Paper Number


Copyright/Permission Statement

This is part of the NBER Program on the Economics of Aging. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated. © 2007 Horneff, Maurer, Mitchell, Stamos. All rights reserved. © 2007 Pension Research Council. All rights reserved.


This research was conducted with 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 German Investment and Asset Management Association (BVI), the German Research Foundation (DFG), the Fritz-Thyssen Foundation, the Observatoire de l’Epargne Européenne (OEE), and the Pension Research Council at The Wharton School of the University of Pennsylvania. We are grateful for useful comments from John Ameriks and Jeffrey Brown.

Included in

Economics Commons



Date Posted: 17 December 2019