Optimal annuity planning and longevity risk: evidence from Korea

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Abstract:

This study examines annuity planning using an optimization framework. An optimization problem is formulated with the objective of maximizing the lifetime utility of consumption and bequestable wealth, and benchmark cases for Korean households are applied. We extend the optimization model suggested in Gupta and Li (2007) by incorporating realistic constraints, such as installment premium contracts, deferred annuity payments and the possibility of borrowing. Further, we have considered a variety of longevity cases. The results confirmed that an annuity is an effective tool for managing longevity risk, and annuitization timing is crucial for the maximization of lifetime utility.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036841003670762

Affiliations: 1: Ewha School of Business, Ewha Womans University, Seodaemun-gu, Seoul 120-750, Republic of Korea 2: School of Business Administration, University of Seoul, Dongdaemun-gu, Seoul 130-743, Republic of Korea

Publication date: April 1, 2011

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