Faculty of Economics and Business Administration Publications Database

Life-Cycle Asset Allocation with Annuity Markets

Horneff, Wolfram J.
Stamos, Michael Z.
Volume: 32
Number: 11
Pages: 3590 - 3612
Month: November
ISSN-Print: 0165-1889
Link External Source: Online Version
Year: 2008
Keywords: Household finance; Portfolio choice; Life annuities; Illiquid assets
Abstract: This paper derives the optimal consumption and portfolio choice pattern over the life-cycle for households facing uninsurable labor income risk, ruin risk, stochastic capital markets, and uncertain lifetime. Our model posits a dynamic utility maximizer with CRRA and Epstein/Zin preferences who has access to liquid stocks, bonds, and illiquid life annuities. We show that a considerable fraction of wealth is gradually annuitized until retirement and beyond to skim the mortality credit. The remaining liquid wealth is mainly invested in stocks to compensate for riskless investment in life annuities. The model allows us to assess the economic importance of common explanations for the empirically low annuity demand by analyzing participations rates, annuitization fractions, and welfare effects.