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Life Annuitization: Why and how Much?

Published online by Cambridge University Press:  17 April 2015

Donatien Hainaut  and
Pierre Devolder
Donatien Hainaut
Affiliation:
Université Catholique de Louvain, Institute of actuarial sciences, Rue des Wallons, 6 B-1348, Louvain-La-Neuve Belgium, E-mail: hainaut@actu.ucl.ac.be
Pierre Devolder
Affiliation:
Université Catholique de Louvain, Institute of actuarial sciences, Rue des Wallons, 6 B-1348, Louvain-La-Neuve Belgium, E-mail: devolder@actu.ucl.ac.be
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Abstract

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This paper addresses some of the problems a majority of retired individuals face: Why and in what proportion should they invest in a life annuity to maximize the utility of their future consumption or a bequest? The market considered in this work is made up of three assets: a life annuity, a risky asset and a cash account. As this problem doesn’t accept any suitable explicit solution, it is numerically solved by the Markov Chain approximation developed by Kushner and Dupuis. Without a bequest motive, we observe that the optimal planning of consumption is divided into two periods and that optimal asset allocation should include the risky asset. Next, the influence of a bequest on consumption and investment pattern is developed. We demonstrate that even with a bequest motive, pensioners should allocate a part of their wealth to the purchase of life annuities.

Keywords

Optimal consumption and portfolio policiesannuity puzzleMarkov chain approximationstochastic control
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 36 , Issue 2 , November 2006 , pp. 629 - 654
Copyright
Copyright © ASTIN Bulletin 2006

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