Financial Markets and Portfolio Management

, Volume 20, Issue 3, pp 265–285

Portfolio management and retirement: what is the best arrangement for a family?


DOI: 10.1007/s11408-006-0022-6

Cite this article as:
Post, T., Gründl, H. & Schmeiser, H. Fin Mkts Portfolio Mgmt (2006) 20: 265. doi:10.1007/s11408-006-0022-6


In comparing an immediate life annuity with a payout-equivalent investment fund payout plan (self-annuitization), research to date has focused mainly on shortfall probabilities of self-annuitization. As an exception, Schmeiser and Post (2005) propose a family strategy where the chances of self-annuitization (i.e., bequests) are taken into consideration as well. In such a family strategy, potential heirs must bear shortfall risks, but in return have a chance of receiving a bequest. This paper analyzes under which conditions heirs will be willing to agree to a family strategy. The idea of a family strategy is integrated into a realistically calibrated intertemporal expected utility framework, taking into account risks arising from stochastic life span, asset returns, and nontradable labor income. A family strategy is shown to be accepted for many parameter combinations, especially in families with low marginal tax rates, if the heirs are wealthy, or in a case where the retiree has an average population life expectancy. We also work out how family self-annuitization decisions interact with asset allocation, saving decisions, and labor income risk. Under realistic conditions our results support two explanations for the empirically observable low demand for annuities (the so-called annuity puzzle), namely intra-family risk sharing and high cost of market-annuitization.


Self-annuitization Life-cycle asset allocation Savings behavior Retirement decisions 

JEL Classification Number

D13 D14 D91 G11 G22 G23 

Copyright information

© Swiss Society for Financial Market Research 2006

Authors and Affiliations

  1. 1.Dr. Wolfgang Schieren Chair for Insurance and Risk ManagementHumboldt-Universität zu BerlinBerlinGermany
  2. 2.Institute of Insurance EconomicsUniversity of St. GallenSt. GallenSwitzerland

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