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Key Findings Details

Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection
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.

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