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Document Details : Title: Life Annuitization Subtitle: Why and How Much? Author(s): HAINAUT, Donatien , DEVOLDER, Pierre Journal: ASTIN Bulletin Volume: 36 Issue: 2 Date: 2006 Pages: 629-654 DOI: 10.2143/AST.36.2.2017936 Abstract : 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. |
