Actuarial Science Seminar: Lifecycle Portfolio Choice with Natural Tontines
Irina Gemmo, Goethe-Universität Frankfurt, Germany
Wednesday 8 May 2019 (11h00 - 12h00) - Extranef - 125
We derive the optimal life-cycle portfolio choice and consumption pattern for a CRRA utility maximizing investor, facing risky capital market returns, systematic mortality risk and a stochastic level of living standard. In addition to stocks and bonds, the individuals have access to tontines. Tontines are cost-efficient financial contracts providing age-increasing, but volatile cash flows, generated through the pooling of mortality without guarantees, which can help to match increasing financing needs at old ages. We show that tontines can generate significant welfare gains. We find a decreasing optimal stake in tontines over the lifecycle to smooth consumption. Higher risk aversion reduces tontine investments and increases stock investment. Depending on the level of bequest motive, the tontine is crowded out by bequeathable assets. Furthermore, we find that the value of the tontine increases in the tontine size and risk aversion. However, since stochastic mortality affects both, expected tontine returns as well as tontine payout uncertainty, the welfare gains diminish.