Modelling Post-Retirement Finances in the Presence of a Bequest Motive, Housing and Public Pension

Ding, Jie

doi:10.2139/ssrn.2251552

Cited by 6 publications

(21 citation statements)

References 13 publications

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“…The effect can be seen in Figure 4. This confirms the findings of Iskhakov et al (2015) (as long as the consumption floor is less than the Age Pension) and Ding (2013) who show that when bequest is considered a luxury, the optimal allocation of risky assets increases with age, implying higher allocation to risky asset throughout retirement. Only when bequest is not considered in a utility maximization model is decreasing the exposure with age indeed optimal (Blake et al, 2014).…”

Section: Optimal Risky Asset Allocationsupporting

confidence: 87%

“…10 There is strong empirical evidence that wealthy retirees leave a larger proportion of their wealth as bequest compared with less wealthy (Ameriks et al (2011), Hurd andSmith (2002), Ding (2013)). …”

Section: Housing Preferencesmentioning

confidence: 99%

“…Ding (2013) suggests that retirees go through the Age Pension in phases in the order of no pension, partial pension due to assets test, partial pension due to income test, and full pension. This is not necessarily true, especially when behavior such as higher consumption early in retirement and wealth accumulation for wealthier households are considered.…”

Section: Optimal Consumptionmentioning

confidence: 99%

“…Hulley et al (2013) investigate the effect of the Age Pension on consumption and investments under constant relative risk aversion (CRRA) utility, while Bateman et al (2007) compare the effect of modeling optimal consumption and investment with hyperbolic absolute risk aversion (HARA) utility against CRRA. Ding (2013) captures the behavior of Australian retirees with regards to consumption, portfolio allocation, and housing in a semi-analytical HARA utility model. Iskhakov et al (2015) models the behavior with a HARA utility maximization approach, but with the purpose of investigating how annuity purchases are affected by different preferences and scenarios.…”

Section: Introductionmentioning

confidence: 99%

“…Tran and Woodland (2014) discuss the selection of model parameters which either match Australian economy rates or are taken from other research in order to ensure that a general equilibrium steady state is achieved, but are not calibrated against data. Calibration in Ding (2013) is based on mean squared error, but residuals are normalized with estimated lifetime wealth. This allows for larger errors in poor households (but improved fit for wealthier households) as the estimated pension received will be rather large in relation to actual wealth.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

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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Section: Optimal Risky Asset Allocationsupporting

confidence: 87%

Section: Housing Preferencesmentioning

confidence: 99%

Section: Optimal Consumptionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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

2016

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Optimal consumption, investment and housing with means-tested public pension in retirement

Andreasson

Shevchenko

Novikov

2017

Insurance: Mathematics and Economics

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Optimal Annuity Purchases for Australian Retirees

2015

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We develop and simulate a stochastic lifecycle model to investigate optimal annuity purchases at retirement. Retirees can invest in risky assets, purchase fairly priced immediate or deferred lifetime annuities, and are eligible for a targeted safety net pension. We match baseline parameters to current Australian settings and conduct scenario analyses over a wide range of individual preferences and financial market outcomes. Except where individuals need to insure a consumption floor, both immediate and deferred annuity purchases are largely crowded out by the means‐tested public pension. Welfare losses caused by zero annuitisation are small compared with the losses caused by completely annuitising all savings, particularly if wealth at retirement is low. Decumulation policy should ensure individuals are well informed of the insurance value of annuities and accommodate diverse choices.

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Modelling Post-Retirement Finances in the Presence of a Bequest Motive, Housing and Public Pension

Cited by 6 publications

References 13 publications

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

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

Optimal consumption, investment and housing with means-tested public pension in retirement

Optimal Annuity Purchases for Australian Retirees

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