50-C
Optimal Asset Allocation in the Pre-Retirement Accumulation Period, Conditional on the Post-Retirement Deccumulation
Tuesday, April 1, 2014: 10:30 a.m.
Virginia Suite AB (Washington Marriott Wardman Park)
We investigate optimal asset allocation in the pre–retirement period, when the individual accumulate his assets, with the respect of the chosen optimal asset allocation and annuitization strategies in the post–retirement period. We assume that the individual has access to the three assets: risk–free asset i.e. one year bond, low–risk asset i.e. 10–years rolling bond and risky asset i.e. equities. We assume that the individual is going to retire at age 65. Before retirement the individual has income from salary and has no access to the annuities and after retirement the individual has no salary but social security income. We investigate three cases regarding the availability of the annuities after retirement. The first one is when the individual has no access to annuities, the second one is when the individual has access to the annuities at age 65 only, and the third one is when the individual can annuities at any age. If the individual has access to annuities, we assume that he will annuitize optimally. We assume that the individual draws utility from consumption and that the criterion for optimization is maximizing expected discounted utility. We use the results for post–retirement optimal consumption, asset allocation and annuitization from Gavranovic (2012). These results are characterized in the utility function at age 65. In this paper, we start from that utility function and investigate optimal consumption and asset allocation in pre–retirement period. We compare the resulting expected discounted utilities in pre–retirement period and make the conclusions about the pre–retirement optimal consumption and asset allocation with respect to the availability of the access to annuities in the post–retirement period assuming optimal consumption, asset allocation and annuitization.
Presentation 1
