Abstract
This chapter develops a methodology for valuing simple cash-flow streams that last a lifetime, which are part of most Defined Benefit (DB) pensions. The focus is on the longevity-contingent building blocks of: (1) immediate, (2) temporary, and (3) deferred income annuities. The chapter begins with a discussion of the value of a longevity-contingent claim and how it differs from the market price versus the manufacturing cost of the product. The algorithms and user-defined R functions are mostly based on the Gompertz law of mortality, although a number of alternative continuous and discrete mortality models are discussed as well. The chapter concludes with a mathematical derivation and implementation of a closed-form expression for the Gompertz Annuity Valuation Model.
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References
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Milevsky, M.A. (2020). Life Annuities: From Immediate to Deferred. In: Retirement Income Recipes in R. Use R!. Springer, Cham. https://doi.org/10.1007/978-3-030-51434-1_10
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DOI: https://doi.org/10.1007/978-3-030-51434-1_10
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