UM07-17: The Role of Fixed and Variable Annuities in Life-Cycle Asset Allocation

Researchers

Abstract

Payout annuities help pool longevity risk. Prior studies focused only on fixed lifetime annuities as retirement financing tools (Dus/Maurer/Mitchell 2005); by contrast, this research analyzes both investment and longevity insurance products, recognizing that variable annuity payouts are not known for certain at retirement. In particular, this project will explore the key risk and return tradeoffs that a retiree in a defined contribution plan faces, as he or she makes crucial decisions about investments, fixed annuities, and variable annuities. The model will illustrate within a life cycle framework how workers with varying risk attitudes can manage risk and return in light of stochastic capital markets, uncertain longevity, labor income volatility, and commissions. The project will inform policy by exploring alternative decumulation or payout strategies from IRAs, 401(k) plans, and Personal Retirement Accounts under a reformed Social Security system.

Publications

Project Year

2007