Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-11T00:13:58.288Z Has data issue: false hasContentIssue false
  • English
  • Français

Investment strategies in retirement: in the presence of a means-tested government pension*

Published online by Cambridge University Press:  21 June 2011

ADAM BUTT  and
ZIYONG DENG
ADAM BUTT
Affiliation:
Australian National University (e-mail: adam.butt@anu.edu.au)
ZIYONG DENG
Affiliation:
Macquarie University
Get access Rights & Permissions [Opens in a new window]

Abstract

A simulation approach is used to investigate how various investment strategies affect the ability of retirees to spend at a desired level up until death. Retirees are assumed to maintain all investment and longevity risk, and also have access to a government-sponsored and means-tested Age Pension to provide part of their desired expenditure. It is found that a 100% allocation to growth assets is optimal for large expenditure desires relative to initial balance levels, with allocations outside of this being sensitive to movements in initial balance and desired expenditure level, as well as interactions with the Age Pension.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 11 , Issue 2 , April 2012 , pp. 151 - 181
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agnew, J., Balduzzi, P. and Sundén, A. (2003) Portfolio choice and trading in a large 401(k) plan. The American Economic Review, 93(1): 193–215.Google Scholar
Albrecht, P. and Maurer, R. (2002) Self-annuitization, consumption shortfall in retirement and asset allocation: the annuity benchmark. Journal of Pension Economics and Finance, 1(3): 269–288.CrossRefGoogle Scholar
Ameriks, J. and Zeldes, S. (2004) How do household portfolio shares vary with age? Unpublished paper, Columbia University Graduate School of Business.Google Scholar
Association of Superannuation Funds of Australia (1999) Achieving an adequate retirement income – how much is enough? ASFA Research Centre Discussion Paper. Sydney: ASFA.Google Scholar
Australian Government Actuary (2009) Australian Life Tables 2005–07.Google Scholar
Australian Prudential Regulation Authority (2010) Statistics: annual superannuation bulletin, June 2009.Google Scholar
Australian Taxation Office (2008) Company tax and imputation: average franking credit and rebate yields. Available at http://www.ato.gov.au (accessed on 20 November 2008).Google Scholar
Blake, D., Cairns, A. J. G. and Dowd, K. (2003) PensionMetrics2: stochastic pension plan design during the distribution phase. Insurance: Mathematics and Economics, 33(1): 29–47.Google Scholar
Bodie, Z. (2003) Thoughts on the future: life-cycle investing in theory and practice. Financial Analysts Journal, 59(1): 24–29.Google Scholar
Bodie, Z., Merton, R. and Samuelson, W. F. (1992) Labor supply flexibility and portfolio choice in a life cycle model. Journal of Economic Dynamics and Control, 16(3–4): 427–449.Google Scholar
Brailsford, T., Handley, J. C. and Maheswaran, K. (2008) Re-examination of the historical equity risk premium in Australia. Accounting and Finance, 48(1): 73–97.Google Scholar
Butt, A. (2009) The funding of closed defined benefit schemes. Presented to the Institute of Actuaries of Australia 2009 Biennial Convention.Google Scholar
Chen, Y. P., Scott, J. C. and Chen, J. (2007) Retirement spending and changing needs during retirement: summary of regression analysis. Presented to Needs and Spending in Retirement: Unravelling the Mystery Symposium, Society of Actuaries Annual Meeting, Washington, DC.Google Scholar
Cutler, D. M., Poterba, J. M. and Summers, L. H. (1991) Speculative dynamics. Review of Economic Studies, 14(3): 529–546.Google Scholar
Dus, I., Maurer, R. and Mitchell, O. S. (2005) Betting on death and capital markets in retirement: a shortfall risk analysis of life annuities versus phased withdrawal plans. NBER Working Paper Series, Working Paper 11271, National Bureau of Economic Research.Google Scholar
Ganegoda, A. and Bateman, H. (2008) Australia's disappearing market for life annuities. Centre for Pensions and Superannuation, Discussion Paper 01/08.Google Scholar
Gerrard, R., Haberman, S. and Vigna, E. (2004) Optimal investment choices post-retirement in a defined contribution pension scheme. Insurance: Mathematics and Economics, 35(2): 312–342.Google Scholar
Gerrard, R., Haberman, S. and Vigna, E. (2006) The management of decumulation risks in a defined contribution pension plan. North American Actuarial Journal, 10(1): 84–110.Google Scholar
Gomes, F. and Michaelides, A. (2005) Optimal life cycle asset allocation: understanding the empirical evidence. Journal of Finance, 60(2): 869–904.Google Scholar
Hatcher, C. B. (2007) A decomposition of the various effects of retirement on consumption. Presented to Needs and Spending in Retirement: Unravelling the Mystery Symposium, Society of Actuaries Annual Meeting, Washington, DC.Google Scholar
Ho, K., Milevsky, M. A. and Robinson, C. (1994) Asset allocation, life expectancy and shortfall. Financial Services Review, 3(2): 109–126.Google Scholar
Huber, P. P. and Verrall, R. J. (1999) The need for theory in actuarial economic models. British Actuarial Journal, 5(2): 377–395.Google Scholar
Kemp, M. (1996) Asset/Liability modelling for pension funds. Presented to the Staple Inn Actuarial Society, 15 October.Google Scholar
Knox, D. and Nelson, M. (2007) The mortality experience of Australian superannuation pensioners: Some surprising results. Presented at the 2nd PBSS Colloquium, Helsinki.Google Scholar
Milevsky, M. A. and Robinson, C. (2000) Self-annuitization and ruin in retirement. North American Actuarial Journal, 4(4): 112–129.Google Scholar
Milevsky, M. A., Ho, K. and Robinson, C. (1997) Asset allocation via the conditional first exit time or how to avoid outliving your money. Review of Quantitative Finance and Accounting, 9(1): 53–70.Google Scholar
Moore, K. S. and Young, V. R. (2006) Optimal and simple, nearly optimal rules for minimizing the probability of financial ruin in retirement. North American Actuarial Journal, 10(4): 145–161.Google Scholar
Office for National Statistics (2009) Occupational pension schemes Annual Report 2008. No. 16, 2008 edition, Editor: Sarah Levy.Google Scholar
Pension Benefit Guaranty Corporation (2005) An analysis of frozen defined benefit plans. December 21.Google Scholar
Poterba, J. and Samwick, A. (2001) Household portfolio allocations over the lifecycle. In Ageing Issues in the U.S. and Japan. Chicago: University of Chicago Press, pp. 65–103.Google Scholar
Poterba, J. M. and Summers, L. H. (1988) Mean reversion in stock prices. Journal of Financial Economics, 22(1): 27–59.Google Scholar
Ruhm, C. J. (2004) Macroeconomic conditions, health and mortality. NBER Working Paper Series, Working Paper 11007, National Bureau of Economic Research.Google Scholar
Sahin, S., Cairns, A., Kleinow, T. and Wilkie, A. D. (2008) Revisiting the Wilkie investment model. Presented at the 18th International AFIR Colloquium, Rome.Google Scholar
Samuelson, P. A. (1989) A case at last for age-phased reduction in equity. Proceedings of the National Academy of Sciences of the USA, 86(22): 9048–9051.Google Scholar
Saunders, P., Patulny, R. and Lee, A. (2004) Updating and extending indicative budget standards for older Australians. Social Policy Research Centre, University of New South Wales. Social Policy Research Centre Report 2/04.Google Scholar
Shiller, R. (2006) Irrational Exuberance, 2nd edition. New York: Currency Doubleday.Google Scholar
Song, Z. S. (2007) The equity risk premium: an annotated bibliography. The Research Foundation of CFA Institute Literature Review.Google Scholar
Stout, R. G. (2008) Stochastic optimization of retirement portfolio asset allocations and withdrawals. Financial Services Review, 17(1): 1–15.Google Scholar
Whitehouse, E. R. and Zaidi, A. (2008) Socio-economic differences in mortality: Implications for pensions policy. OECD Social Employment and Migration Working Papers, No. 71, OECD publishing.Google Scholar
Wilkie, A. D. (1995) More on a stochastic investment model for actuarial use. British Actuarial Journal, 1(5): 777–964.Google Scholar
Young, V. R. (2004) Optimal investment strategy to minimize the probability of lifetime ruin. North American Actuarial Journal, 8(4): 106–126.Google Scholar