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Optimal post-retirement investment under longevity risk in collective funds

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  • John Armstrong
  • Cristin Buescu
  • James Dalby

Abstract

We study the optimal investment problem for a homogeneous collective of $n$ individuals investing in a Black-Scholes model subject to longevity risk with Epstein--Zin preferences. %and with preferences given by power utility. We compute analytic formulae for the optimal investment strategy, consumption is in discrete-time and there is no systematic longevity risk. We develop a stylised model of systematic longevity risk in continuous time which allows us to also obtain an analytic solution to the optimal investment problem in this case. We numerically solve the same problem using a continuous-time version of the Cairns--Blake--Dowd model. We apply our results to estimate the potential benefits of pooling longevity risk over purchasing an insurance product such as an annuity, and to estimate the benefits of optimal longevity risk pooling in a small heterogeneous fund.

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  • John Armstrong & Cristin Buescu & James Dalby, 2024. "Optimal post-retirement investment under longevity risk in collective funds," Papers 2409.15325, arXiv.org.
    • Handle: RePEc:arx:papers:2409.15325
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    File URL: http://arxiv.org/pdf/2409.15325
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