Money in Motion: Dynamic Portfolio Choice in Retirement 08/07/ ARIA Annual Meeting 2007 Money in Motion: Dynamic Portfolio Choice in Retirement By Wolfram J. Horneff, Raimond H. Maurer, Olivia S. Mitchell, and Michael Z. Stamos Discussant: Gudrun Hoermann, University of St. Gallen

Money in Motion: Dynamic Portfolio Choice in Retirement 08/07/ Comments & Questions Context and Contribution: –Contribution to optimal management of asset decumulation process in retirement by optimal dynamic portfolio choice involving variable payout annuities –Topic of current relevance (for retirees, insurers, financial planners; social security system) –Research gap affecting science and practice Aim: –Develop model for dynamic utility maximizer making both asset location and allocation decisions in the retirement portfolio –Apply model to show utility of variable payout annuities and to study the effect of pre-retirement savings, income, bequest motives, etc. Literature: –Restrictions of existing literature and extensions by paper very clearly laid out Results and Application: –Lots of different analyses provide a comprehensive view of properties and effects of variable payout annuities

Money in Motion: Dynamic Portfolio Choice in Retirement 08/07/ Model: –The mechanics of variable payout annuities:  Concept of the mortality credit: o Advantage of annuity products o Formal explanation –The Investor`s Optimization Problem:  CRRA utility function: o Do all analyses that compare the utility of annuities use the same or a similar utility function? If not: (How) are the results comparable? o The time preference β = 0.96 seems to be used throughout the analyses. Is this value typical? How can it be interpreted? o The retiree‘s pension benefit Y is normalized to 1. Would it be interesting to consider scenarios with a stochastic yearly income? Comments & Questions

Money in Motion: Dynamic Portfolio Choice in Retirement 08/07/  Survival probabilities from the US 1996 Annuity 2000 female mortality table are used for conservative pricing of a male annuity. o Why did you choose the corresponding population table to calculate utility? What is the effect of that choice? o How would utility change if market prices were used? Results and Application: –Are the results generally stable for a risk-averse decision maker? –What is the reason for a resulting counter-cyclical optimal investment strategy in contrast to other studies? –A third scenario “(3) Stock/Bond Strategy with fixed payout annuities“ might be interesting in order to see the difference between fixed and variable payout annuities. –Comparison with fixed 60/40 investment mix:  Good, that this comparison is mentioned.  How high, do you think, would the transaction costs for your dynamic portfolio be, compared to the utility gain from it? Comments & Questions