Dynamic Asset Allocation When Bequests are Luxury Goods

Ding, Jie; Kingston, Geoffrey; Purcal, Sachi

doi:10.2139/ssrn.2440987

Cited by 18 publications

(16 citation statements)

References 17 publications

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“…In Figure 5, the proportion of surplus wealth for case 3 rises along with age, producing a convex shape. This trend is similar to that reported in the study by Ding et al [17], in which retirees are assumed to replicate a European put option for their wealth requirement. 4 Retirees are also found to use increasing risk exposure to hedge against risk in other studies, such as Hulley et al [47] and Thorp et al [48].…”

Section: Numerical Results and Discussionsupporting

confidence: 89%

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Optimal Time to Enter a Retirement Village

Zhang

Purcal

Wei

2017

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Abstract:We consider the financial planning problem of a retiree wishing to enter a retirement village at a future uncertain date. The date of entry is determined by the retiree's utility and bequest maximisation problem within the context of uncertain future health states. In addition, the retiree must choose optimal consumption, investment, bequest and purchase of insurance products prior to their full annuitisation on entry to the retirement village. A hyperbolic absolute risk-aversion (HARA) utility function is used to allow necessary consumption for basic living and medical costs. The retirement village will typically require an initial deposit upon entry. This threshold wealth requirement leads to exercising the replication of an American put option at the uncertain stopping time. From our numerical results, active insurance and annuity markets are shown to be a critical aspect in retirement planning.

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Section: Numerical Results and Discussionsupporting

confidence: 89%

“…In letting W(t) can fulfil such requirement, we are inspired by Ding et al [17] and assume that retirees would separate their wealth into two parts: surplus wealthW(t) and protected wealthŴ(t):…”

Section: Case 3: With Bequest Complete Insurance Market and Wealth Fmentioning

confidence: 99%

Optimal Time to Enter a Retirement Village

Zhang

Purcal

Wei

2017

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“…where γ H is the the risk aversion parameter for housing (allowed to be different from risk aversion for consumption and bequest), ζ d is the same scaling factor as in equation (8), 8 As housing is both a necessity and bequest it cannot be treated the same as other bequest (Ding et al, 2014), since the intentional bequest component is difficult to separate. By using luxury bequest the model can better explain inequalities between wealth percentiles as wealthier retirees tend to bequeath a larger proportion of their assets.…”

Section: Housing Preferencesmentioning

confidence: 99%

Optimal Consumption, Investment and Housing with Means-Tested Public Pension in Retirement

2016

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In this paper, we develop an expected utility model for the retirement behavior in the decumulation phase of Australian retirees with sequential family status subject to consumption, housing, investment, bequest and government provided means-tested Age Pension. We account for mortality risk and risky investment assets, and introduce a health proxy to capture the decreasing level of consumption for older retirees. Then we find optimal housing at retirement, and optimal consumption and optimal risky asset allocation depending on age and wealth. The model is solved numerically as a stochastic control problem, and is calibrated using the maximum likelihood method on empirical data of consumption and housing from the Australian Bureau of Statistics 2009-2010 Survey. The model fits the characteristics of the data well to explain the behavior of Australian retirees. The key findings are the following: first, the optimal policy is highly sensitive to means-tested Age Pension early in retirement but this sensitivity fades with age. Secondly, the allocation to risky assets shows a complex relationship with the means-tested Age Pension that disappears once minimum withdrawal rules are enforced. As a general rule, when wealth decreases the proportion allocated to risky assets increases, due to the Age Pension working as a buffer against investment losses. Finally, couples can be more aggressive with risky allocations due to their longer life expectancy compared with singles.

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“…We adapt the model previously developed in Andreasson et al (2017) to examine the impact of this policy change on an individual retiree. This model captures retirement behaviour in the decumulation phase of Australian retirees subject to consumption, housing, investment, bequest and government-provided means-tested Age Pension and is an extension with stochastic factors (mortality, risky investments and sequential family status) to what was originally presented in Ding (2014); Ding et al (2014). The contribution of this paper is to improve the understanding of the effect deeming rate-based policies have on a typical retiree's optimal decisions, both in terms of how the optimal behaviour changes and whether the retiree is better or worse off.…”

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Assessment of Policy Changes to Means-Tested Age Pension Using the Expected Utility Model: Implication for Decisions in Retirement

Andreasson

Shevchenko

2017

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Means-tested pension policies are typical for many countries, and the assessment of policy changes is critical for policy makers. In this paper, we consider the Australian means-tested Age Pension. In 2015, two important changes were made to the popular Allocated Pension accounts: the income means-test is now based on deemed income rather than account withdrawals, and the income-test deduction no longer applies. We examine the implications of the new changes in regard to optimal decisions for consumption, investment and housing. We account for regulatory minimum withdrawal rules that are imposed by regulations on Allocated Pension accounts, as well as the 2017 asset-test rebalancing. The policy changes are considered under a utility-maximising life cycle model solved as an optimal stochastic control problem. We find that the new rules decrease the advantages of planning the consumption in relation to the means-test, while risky asset allocation becomes more sensitive to the asset-test. The difference in optimal drawdown between the old and new policy is only noticeable early in retirement until regulatory minimum withdrawal rates are enforced. However, the amount of extra Age Pension received by many households is now significantly higher due to the new deeming income rules, which benefit wealthier households who previously would not have received Age Pension due to the income-test and minimum withdrawals.

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Dynamic Asset Allocation When Bequests are Luxury Goods

Cited by 18 publications

References 17 publications

Optimal Time to Enter a Retirement Village

Optimal Time to Enter a Retirement Village

Optimal Consumption, Investment and Housing with Means-Tested Public Pension in Retirement

Assessment of Policy Changes to Means-Tested Age Pension Using the Expected Utility Model: Implication for Decisions in Retirement

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