Asset Allocation and Location Over the Life Cycle with Survival-Contingent Payouts

31 Pages Posted: 9 Jun 2008 Last revised: 29 May 2022

See all articles by Wolfram J. Horneff

Wolfram J. Horneff

Deka Investment

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Michael Z. Stamos

Allianz Global Investors

Date Written: June 2008

Abstract

This paper shows how lifelong survival-contingent payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations. Our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival-contingent payouts over the lifetime, and also asset allocation paths, showing how to invest in stocks versus bonds. We confirm that the investor will gradually move money out of her liquid saving into survival-contingent assets to retirement and beyond, thereby enhancing her welfare by as much as 50 percent. The results are also robust to the introduction of uninsurable consumption shocks in housing expenses, income flows during the worklife and retirement, sudden changes in health status, and medical expenses.

Suggested Citation

Horneff, Wolfram J. and Maurer, Raimond and Mitchell, Olivia S. and Stamos, Michael Z., Asset Allocation and Location Over the Life Cycle with Survival-Contingent Payouts (June 2008). NBER Working Paper No. w14055, Available at SSRN: https://ssrn.com/abstract=1142227

Wolfram J. Horneff

Deka Investment ( email )

Hans-Bethe-Str. 11
Frankfurt, 60438
Germany
004915152529967 (Phone)

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Z. Stamos

Allianz Global Investors ( email )

Mainzer Landstrasse 11-13
Frankfurt, 60329
Germany