RT Journal Article
SR Electronic
T1 Optimal Longevity Risk Management in the Retirement Stage of the Life Cycle
JF Special Issues
FD Institutional Investor Journals
SP 66
OP 86
DO 10.3905/sp.2017.2017.1.066
VO 2017
IS 1
A1 Koray D. Simsek
A1 Min Jeong Kim
A1 Woo Chang Kim
A1 John M. Mulvey
YR 2017
UL https://pm-research.com/content/2017/1/66.abstract
AB The uncertainty in life expectancy plays a critical role in individual financial planning. Its impact is magnified during the retirement years, also called the wealth distribution stage of the life-cycle, as new sources of income are typically not available to individuals. Utilizing a multi-stage stochastic program, we model and solve the optimal asset allocation problem of a retired couple with uncertain life expectancy in the presence of a term life insurance policy. In the base case, we find optimal policies assuming no longevity risk (i.e., lifetime scenarios are uncertain although life expectancy is fixed on the retirement date). Next, we introduce longevity risk in the scenario generation stage through either a shift in the expected lifetimes or an unexpected cut in periodic retirement income. We find that optimal asset allocation policy depends on the presence and the type of these risks as well as the relative price of insurance and the percentage cut in pension benefits.