Retirement planning in individual asset–liability management

Retirement planning in individual asset–liability management

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Article ID: iaor20125695
Volume: 23
Issue: 4
Start Page Number: 365
End Page Number: 396
Publication Date: Oct 2012
Journal: IMA Journal of Management Mathematics
Authors: , , , ,
Keywords: asset liability management, pensions, portfolio management
Abstract:

Increasing financial pressure on State‐controlled pension systems has caused, over the last two decades or so, an unprecedented effort by private pension funds (PFs) and insurance companies to issue new types of retirement vehicles. This article investigates the effects of such widespread phenomenon from the perspective of individual asset–liability management. A multistage stochastic programming problem has been formulated with investment opportunities including PFs, unit‐linked contracts and variable life annuities. The introduction of a specific risk measure with respect to a desirable retirement income stream and a planning horizon spanning the entire individuals' working life helps to analyse the implications of observed market dynamics on retirement strategies. We present comparative results focusing on the retirement planning problem for three representative individuals carrying different time horizons but common retirement goals. The results show the benefits over traditional pension accumulation plans of dynamic strategies based on mixed portfolios of retirement products.

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