TY  - JOUR
AU  - Horneff,Wolfram J.
AU  - Maurer,Raimond
AU  - Mitchell,Olivia S.
AU  - Dus,Ivica
TI  - Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12392
PY  - 2006
Y2  - July 2006
UR  - http://www.nber.org/papers/w12392
L1  - http://www.nber.org/papers/w12392.pdf
N1  - Author contact info:
Raimond Maurer
Finance Department
Goethe University
Grüneburgplatz 1 (Uni-PF. H 23)
Frankfurt am Main
Germany
E-Mail: rmaurer@wiwi.uni-frankfurt.de

Olivia S. Mitchell
University of Pennsylvania
Wharton School
3620 Locust Walk, St 3000 SH-DH
Philadelphia, PA 19104-6302
Tel: 215-898-0424
Fax: 215/898-0310
E-Mail: mitchelo@wharton.upenn.edu

Ivica Dus
AB  - Retirees must draw down their accumulated assets in an orderly fashion so as not to exhaust their funds too soon. We derive the optimal retirement portfolio from a menu that includes payout annuities as well as an investment allocation and a withdrawal strategy, assuming risk aversion, stochastic capital markets, and uncertain lifetimes. The resulting portfolio allocation, when fixed as of retirement, is then compared to phased withdrawal strategies such a %u201Cself-annuitization%u201D plan or the 401(k) %u201Cdefault%u201D pattern encouraged under US tax law. Surprisingly, the fixed percentage approach proves appealing for retirees across a wide range of risk preferences, supporting financial planning advisors who often recommend this rule. We then permit the retiree to switch to an annuity later, which gives her the chance to invest in the capital market and %u201Cbet on death.%u201D As risk aversion rises, annuities first crowd out bonds in retiree portfolios; at higher risk aversion still, annuities replace equities in the portfolio. Making annuitization compulsory can also lead to substantial utility losses for less risk-averse investors.
ER  -