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http://dx.doi.org/10.7232/IEIF.2011.24.3.173

An Optimal Strategy for Private Life Annuity by Utilizing AEW  

Yang, Jae-Hwan (Department of Business Administration, University of Seoul)
Yuh, Yoon-Kyung (Ewha School of Business, Ewha Womans University)
Publication Information
IE interfaces / v.24, no.3, 2011 , pp. 173-186 More about this Journal
Abstract
In this paper, we evaluate life annuity plans for Korean pre-retired single and married couple participating Korea National Pension (KNP) and find optimal life annuity strategy by using utility-based measurements called AEW (Annuity Equivalent Wealth). Specifically, we extend a previous study to obtain a detailed optimal combination of annuitizing age and wealth in terms of percentage of net wealth at the time of retirement. A nonlinear optimization model is formulated with the objective of maximizing utility on consumption and bequest, and the dynamic programming (DP) technique is used to solve this problem. We find that there exist consistent patterns in optimal combinations of annuitizing age and wealth. Also, for all cases the optimal combination is significantly better than several other combinations. The results indicate that using the optimal approach can be beneficial to practitioners in insurance industry and prospective purchasers of life annuity. We conclude the paper with some discussions and suggestions.
Keywords
dynamic programming; optimal annuity planning; life annuity; aging of the population; national pension;
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Times Cited By KSCI : 1  (Citation Analysis)
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