Longevity Assets and Pre-Retirement Consumption/Portfolio Decisions

EIC Working Paper Series 2/2015

43 Pages Posted: 6 Nov 2015 Last revised: 18 Nov 2015

See all articles by Francesco Menoncin

Francesco Menoncin

University of Brescia - Department of Economics

Luca Regis

University of Turin; Collegio Carlo Alberto

Date Written: October 30, 2015

Abstract

We derive a closed form solution for the optimal consumption/investment problem of an agent whose force of mortality is stochastic and whose financial horizon coincides with a fixed retirement date. The investment set includes a longevity asset, as a derivative on the force of mortality. We explore the optimal choices of a representative agent having Hyperbolic Absolute Risk Aversion preferences on both consumption and final wealth. Our numerical analysis shows that individuals optimally invest a large fraction of their wealth in the longevity asset. In our base scenario, calibrated on real world data, a 60-year old male retiring after 5 years should invest around 88% of his wealth in the longevity asset. Such a percentage decreases as time to retirement decreases. We explore sensitivity of our results to market and individual characteristics.

Keywords: longevity risk, pre-retirement savings, consumption/portfolio choices, HARA preferences

JEL Classification: C61, G11

Suggested Citation

Menoncin, Francesco and Regis, Luca, Longevity Assets and Pre-Retirement Consumption/Portfolio Decisions (October 30, 2015). EIC Working Paper Series 2/2015, Available at SSRN: https://ssrn.com/abstract=2684044 or http://dx.doi.org/10.2139/ssrn.2684044

Francesco Menoncin

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy
0039-0302988806 (Phone)
0039-0302988837 (Fax)

HOME PAGE: http://www.eco.unibs.it/~menoncin/

Luca Regis (Contact Author)

University of Turin ( email )

Corso Unione Sovietica 218 bis
Torino, Turin 10100
Italy

Collegio Carlo Alberto

Piazza Albarello , 8
Turin
Italy

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