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IMPLEMENTING INDIVIDUAL SAVINGS DECISIONS FOR RETIREMENT WITH BOUNDS ON WEALTH

Published online by Cambridge University Press:  30 October 2017

Catherine Donnelly ,
Montserrat Guillen ,
Jens Perch Nielsen  and
Ana Maria Pérez-Marín
Catherine Donnelly
Affiliation:
Department of Actuarial Mathematics and Statistics, and the Maxwell Institute for Mathematical Sciences, Heriot-Watt University, Edinburgh EH14 4AS, UK E-mail: C.Donnelly@hw.ac.uk
Montserrat Guillen*
Affiliation:
Department of Econometrics, Riskcenter-IREA, University of Barcelona, Avinguda Diagonal 690, 08034 Barcelona, Spain
Jens Perch Nielsen
Affiliation:
Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UK E-Mail: Jens.Nielsen.1@city.ac.uk
Ana Maria Pérez-Marín
Affiliation:
Department of Econometrics, Riskcenter-IREA, University of Barcelona, Avinguda Diagonal 690, 08034 Barcelona, Spain E-Mail: amperez@ub.edu
*
E-Mail: mguillen@ub.edu
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Abstract

We present a savings plan for retirement that removes risk by fixing a constraint on a life-long pension so that it has an upper and a lower bound. This corresponds to the ideas of Nobel laureate R.C. Merton whose implementation has never been published. We show with an illustration that our proposed practical algorithm reproduces the theoretical results after a savings period of around 30 years by using daily, monthly, weekly or yearly updates of the investment positions. We calculate the percentiles of the final accumulated wealth distribution for the adjusted implementation. In the simulated illustration, we observe that the adjusted values converge to the theoretical values of the percentiles when the frequency of update increases. We conclude that monthly adjustments result in a practical way to implement theoretical results that were obtained under the hypothesis of a continuous process by Donnelly et al. (2015). This method is easy to use in practice by pension savers and fund managers.

Keywords

Pensionslongevityinvestmentsavings strategyguaranteed annuities
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 48 , Issue 1 , January 2018 , pp. 111 - 137
Copyright
Copyright © Astin Bulletin 2017 

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