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Optimal Longevity Risk Management in the Retirement Stage of the Life Cycle

Koray D. Simsek, Min Jeong Kim, Woo Chang Kim and John M. Mulvey
The Journal of Retirement Winter 2018, 5 (3) 73-92; DOI: https://doi.org/10.3905/jor.2018.5.3.073
Koray D. Simsek
is an associate professor of finance in the Crummer Graduate School of Business at Rollins College in Winter Park, FL
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Min Jeong Kim
is a deputy research fellow in the Investment Policy Division at the National Pension Research Institute in Jeollabuk-do, Republic of Korea
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Woo Chang Kim
is an associate professor in the Department of Industrial and Systems Engineering at the Korea Advanced Institute of Science and Technology (KAIST) in Daejeon, Republic of Korea
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John M. Mulvey
is a professor of Operations Research and Financial Engineering at Princeton University in Princeton, NJ
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Abstract

The uncertainty in life expectancy plays a critical role in individual financial planning. Its impact is magnified during the retirement years (the wealth distribution stage of the life cycle), as new sources of income typically are not available to retired persons. Utilizing a multi-stage stochastic program, the authors model and solve the optimal asset allocation problem of a retired couple with uncertain life expectancy in the presence of a term life insurance policy. In the base case, they find optimal policies assuming no longevity risk (i.e., lifetime scenarios are uncertain although life expectancy is fixed on the retirement date). Next, they introduce longevity risk in the scenario generation stage through either a shift in the expected lifetimes or an unexpected cut in periodic retirement income. The authors find that the optimal asset allocation policy depends on the presence and the type of these risks as well as the relative price of insurance and the size of any cut in pension benefits.

TOPICS: Retirement, risk management, statistical methods

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The Journal of Retirement: 5 (3)
The Journal of Retirement
Vol. 5, Issue 3
Winter 2018
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Optimal Longevity Risk Management in the Retirement Stage of the Life Cycle
Koray D. Simsek, Min Jeong Kim, Woo Chang Kim, John M. Mulvey
The Journal of Retirement Jan 2018, 5 (3) 73-92; DOI: 10.3905/jor.2018.5.3.073

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Optimal Longevity Risk Management in the Retirement Stage of the Life Cycle
Koray D. Simsek, Min Jeong Kim, Woo Chang Kim, John M. Mulvey
The Journal of Retirement Jan 2018, 5 (3) 73-92; DOI: 10.3905/jor.2018.5.3.073
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