Working Paper: NBER ID: w19206
Authors: Vanya Horneff; Raimond Maurer; Olivia S. Mitchell; Ralph Rogalla
Abstract: We evaluate lifecycle consumption and portfolio allocation patterns resulting from access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities, one of the most rapidly-growing financial innovations over the last two decades. A key feature of these products is that they offer access to equity investments with downside protection, hedging of longevity risk, and partially-refundable premiums. Welfare rises since policyholders exercise the product's flexibility by taking withdrawals and dynamically adjusting their portfolios and consumption streams. Consistent with observed behavior, differences across individuals' cash out and annuitization patterns result from variations in realized equity market returns and labor income trajectories.
Keywords: Lifecycle Consumption; Portfolio Allocation; Variable Annuities; Retirement Security
JEL Codes: D14; D91; G11; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Differences in realized equity market returns (G19) | Variations in cash out and annuitization patterns (G51) |
| Labor income trajectories (J39) | Variations in cash out and annuitization patterns (G51) |
| Cash out patterns at retirement (J26) | Market conditions (D49) |
| Market conditions (D49) | Cash out patterns at retirement (J26) |
| Access to GMWBs (G23) | Increased welfare (I38) |
| Access to GMWBs (G19) | Consumption flexibility (D11) |
| GMWBs (E13) | Flexible withdrawals (G51) |
| GMWBs (E13) | Dynamic adjustments to portfolios (G11) |