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Key Findings Details

Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection
by Vanya Horneff, Raimond H. Maurer, Olivia S. Mitchell and Ralph Rogalla
WP 2013-286
  • We devise a life-cycle consumption and portfolio choice model for an individual who -- in addition to stocks and bonds -- can gradually purchase fairly-priced deferred variable annuities with Guaranteed Minimum Withdrawal Benefits (GMWBs).
  • We show that investors optimally purchase measurable amounts of GMWBs well before retirement because of their flexibility and access to the stock market.
  • Policyholders will exercise this flexibility by taking withdrawals to adjust their portfolios and consumption streams. Nevertheless, at retirement, they also convert much of their accumulated amounts into additional annuities.
  • Heterogeneity analysis suggests that differences in individuals’ cash out and annuitization patterns result from variations in realized cumulative equity market return and labor income trajectories.