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Self-annuitization, ruin risk in retirement and asset allocation : the annuity benchmark

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  • Albrecht, Peter
  • Maurer, Raimond

Abstract

The present paper considers a retiree of a certain age with an initial endowment of investable wealth facing the following alternative investment opportunities. One possibility is to buy a single premium immediate annuity-contract. This insurance contract pays a life-long constant pension payment of a certain amount, depending e.g. on the age of the retiree, the operating cost of the insurance company and the return the company is able to realize from its investments. The alternative possibility is to invest the single premium into a portfolio of mutual funds and to periodically withdraw a fixed amount, in the present paper chosen to be equivalent to the consumption stream generated by the annuity . The particular advantage of this self annuitization strategy compared to the life annuity is its greater liquidity. However, the risk of the second opportunity is to outlive the income stream generated by this investment. The risk in this sense is specified by considering the probability of running out of money before the uncertain date of death. The determination of this personal ruin probability with respect to German mortality and capital market conditions is the objective of the following paper.

Suggested Citation

  • Albrecht, Peter & Maurer, Raimond, 2001. "Self-annuitization, ruin risk in retirement and asset allocation : the annuity benchmark," Papers 01-35, Sonderforschungsbreich 504.
    • Handle: RePEc:mnh:spaper:2803
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    File URL: https://madoc.bib.uni-mannheim.de/2803/1/dp01_35.pdf
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    References listed on IDEAS

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    1. Milevsky, Moshe Arye & Ho, Kwok & Robinson, Chris, 1997. "Asset Allocation via the Conditional First Exit Time or How to Avoid Outliving Your Money," Review of Quantitative Finance and Accounting, Springer, vol. 9(1), pages 53-70, July.
    2. Albrecht, Peter & Maurer, Raimond, 2001. "Zum systematischen Vergleich von Rentenversicherung und Fondsentnahmeplänen unter dem Aspekt des Kapitalverzehrrisikos - der Fall nach Steuern," Sonderforschungsbereich 504 Publications 01-11, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    3. Moshe Milevsky & Chris Robinson, 2000. "Self-Annuitization and Ruin in Retirement," North American Actuarial Journal, Taylor & Francis Journals, vol. 4(4), pages 112-124.
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    Cited by:

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    2. He, Lin & Liang, Zongxia, 2013. "Optimal dynamic asset allocation strategy for ELA scheme of DC pension plan during the distribution phase," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 404-410.

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