#07-25
Money in Motion: Dynamic Portfolio Choice in Retirement
Wolfram J. Horneff, Raimond H. Maurer, Olivia S. Mitchell, and Michael Z. Stamos
Abstract: Retirees confront the difficult problem of how to manage their money in retirement so as to not
outlive their funds while continuing to invest in capital markets. We posit a dynamic utility
maximizer who makes both asset location and allocation decisions when managing her
retirement financial wealth and annuities, and we prove that she can benefit from both the equity
premium and longevity insurance in her retirement portfolio. Even without bequests, she will not
fully annuitize; rather, her optimal stock allocation amounts initially to more than half of her
financial wealth and declines with age. Welfare gains from this strategy can amount to 40
percent of financial wealth (depending on risk parameters and other resources). In practice, it
turns out that many retirees will do almost as well by purchasing a variable annuity invested
60/40 in stocks/bonds.
Keywords:
JEL classifications: G11 Portfolio Choice; G23 Private Financial Services; G22 Insurance; D14 Personal Finance; J26
Retirement Policies; H55 Social Security
