This article assesses the impact of variable investment-linked deferred annuities (VILDAs) on lifecycle consumption and portfolio allocation, allowing for systematic longevity risk. Under a self-insurance strategy, insurers set premiums to reduce the chance that benefits paid exceed provider reserves. Under a participating approach, the provider avoids taking systematic longevity risk by adjusting benefits in response to unanticipated mortality shocks. Young households with participating annuities average one-third higher excess consumption, while 80-year-olds increase consumption about 75 percent. Many households would prefer to participate in systematic longevity risk unless insurers can hedge it at a very low price.

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This paper assesses optimal life cycle consumption and portfolio allocations when households have access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities over their adult lifetimes. Our contribution is to evaluate demand for these products which provide access to equity investments with money-back guarantees, longevity risk hedging, and partially-refundable premiums, in a realistic world with uncertain labor and capital market income as well as mortality risk. Others have predicted that consumers will only purchase such annuities late in life, but we show that they will optimally purchase GMWBs prior to retirement, consistent with their recent rapid uptick in sales. Additionally, many individuals optimally adjust their portfolios and consumption streams along the way by taking cash withdrawals from the products. These products can substantially enhance consumption, by up to 10% for those who experience highly unfavorable experiences in the stock market. We evaluate lifecycle consumption and portfolio allocation patterns resulting from access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities, one of the most rapidlygrowing financial innovations over the last two decades. A key feature of these products is that they offer access to equity investments with downside protection, hedging of longevity risk, and partially-refundable premiums. Welfare rises since policyholders exercise the product's flexibility by taking withdrawals and dynamically adjusting their portfolios and consumption streams. Consistent with observed behavior, differences across individuals' cash out and annuitization patterns result from variations in realized equity market returns and labor income trajectories.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractDue to the recent downturn in international equity markets, the interest in real-estate investments has soared. However, the well-known problems of direct real-estate investments complicate becoming well-diversified with this investment class. Indirect real-estate investments can provide a solution to this problem. Shares of real-estate investment companies are very popular in this context. The German market for securitised real-estate investments additionally provides open-ended real-estate funds (so called " Offene Immobilienfonds"). An open-end real-estate fund is a pool of money from many investors, with which a special investment company, acting as a trustee, invests it in real estate. Thus, the individual investors are directly involved in the real-estate market.This study is based on monthly and yearly return data from January 1975 to December 2002. It seeks to identify the short and long-term financial characteristics of investments into open-ended real-estate funds, and to compare them with those of other major asset classes like bonds, equities, and money market investments. In this sense, the considerations comprise extensive univariate and multivariate analyses of real-estate fund returns. Furthermore, the long-term risk/return profile of real-estate fund investments relative to other investment opportunities is investigated. Additionally, this paper provides a brief overview of the institutional design and role of German open-end real-estate mutual funds.Empirical evidence suggests that the financial characteristics of open-ended real-estate funds clearly distinguish them from other (financial) asset classes. These characteristics are in many respects similar to those known from dir ect real-estate investments. Accordingly, the German open-end real-estate funds qualify themselves more for medium and long-term investment horizons, than for short holding periods. All in all, this indirect real-estate investment vehicle is characterised by moderate and relatively stable returns over time.