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Retirement IncomeRisks and Strategies$
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Mark J. Warshawsky

Print publication date: 2011

Print ISBN-13: 9780262016933

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262016933.001.0001

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Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses

Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses

Chapter:
(p.127) 6 Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses
Source:
Retirement Income
Author(s):

Gaobo Pang

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262016933.003.0006

This chapter offers a comprehensive stochastic life-cycle framework to address the major risks and choices for households in the retirement phase. It assumeds, for purposes of discussion, that annuitization can be made at any age and in any amount, in contrast to a one-time choice of annuitization upon retirement in many previous studies. Life annuity basically represents a class of financial assets with its own unique risk and return features. The key logic in the chapter is that the uncertainty in uninsured health expenses generally leads to precautionary savings, and rational households should shift their assets from risky equities to riskless bonds for a desired level of risk exposure. The simulated optimal portfolio is similar to the practice of life-cycle (target-date) funds in the retirement phase.

Keywords:   retirement phase, annuitization, life annuity, financial assets, risk and return, precautionary savings, risky equities, riskless bonds, risk exposure

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