Optimal Allocation to Deferred Income Annuities

18 Pages Posted: 6 Dec 2018 Last revised: 16 Mar 2019

See all articles by Faisal Habib

Faisal Habib

York University - Schulich School of Business; CANNEX Financial Exchanges Limited

Huang Huaxiong

York University - Department of Mathematics and Statistics

Adam Mauskopf

York University, Students

Branislav Nikolic

York University - Department of Mathematics and Statistics

T. S. Salisbury

York University

Date Written: March 14, 2019

Abstract

In this paper we employ a lifecycle model that uses utility of consumption and bequest to determine an optimal Deferred Income Annuity (DIA) purchase policy. We lay out a mathematical framework to formalize the optimization process. The method and implementation of the optimization is explained, and the results are then analyzed. We extend our model to control for asset allocation and show how the purchase policy changes when one is allowed to vary asset allocation. Our results indicate that (i.) refundable DIAs are less appealing than non-refundable DIAs because of the loss of mortality credits; (ii.) the DIA allocation region is larger under the fixed asset allocation strategy due to it becoming a proxy for fixed-income allocation; and (iii.) when the investor is allowed to change asset-allocation, DIA allocation becomes less appealing. However, a case for higher DIA allocation can be made for those individuals who perceive their longevity to be higher than the population.

Keywords: lifecycle, optimization, optimal control, HJB

JEL Classification: G11, C61, D91

Suggested Citation

Habib, Faisal and Huaxiong, Huang and Mauskopf, Adam and Nikolic, Branislav and Salisbury, Thomas S., Optimal Allocation to Deferred Income Annuities (March 14, 2019). Available at SSRN: https://ssrn.com/abstract=3283190 or http://dx.doi.org/10.2139/ssrn.3283190

Faisal Habib

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

CANNEX Financial Exchanges Limited ( email )

1200 Bay Street Suite 1001
Toronto, ON M5R 2A5
Canada

HOME PAGE: http://www.cannex.com

Huang Huaxiong

York University - Department of Mathematics and Statistics ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
United States

Adam Mauskopf

York University, Students ( email )

Ontario
Canada

Branislav Nikolic

York University - Department of Mathematics and Statistics ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
United States

Thomas S. Salisbury (Contact Author)

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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