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

Vanya Horneff; Raimond Maurer; Olivia S. Mitchell; Ralph Rogalla

doi:10.3386/w19206

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

Vanya Horneff, Raimond Maurer, Olivia S. Mitchell & Ralph Rogalla

Working Paper 19206

DOI 10.3386/w19206

Issue Date July 2013

We evaluate lifecycle consumption and portfolio allocation patterns resulting from access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities, one of the most rapidly-growing financial innovations over the last two decades. A key feature of these products is that they offer access to equity investments with downside protection, hedging of longevity risk, and partially-refundable premiums. Welfare rises since policyholders exercise the product's flexibility by taking withdrawals and dynamically adjusting their portfolios and consumption streams. Consistent with observed behavior, differences across individuals' cash out and annuitization patterns result from variations in realized equity market returns and labor income trajectories.

The research reported herein was performed pursuant to a grant from the US Social Security Administration (SSA) to the Michigan Retirement Research Center (MRRC) as part of the Retirement Research Consortium. We are also grateful for research support provided by the TIAA-CREF Research Institute, the German Investment and Asset Management Association (BVI), the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania, and the Metzler Exchange Professor program. This research is part of the NBER programs on Aging, Public Economics, and Labor Studies. All opinions and any errors are solely those of the authors and not of the institutions with whom the authors are affiliated. © 2013 Horneff, Maurer, Mitchell, Rogalla. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Olivia S. Mitchell
Mitchell serves as a Trustee for the Wells Fargo Advantage Funds and has received more than $10,000 from the TIAA-CREF Institute and RAND for research studies on retirement security.
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Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection

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