Less is more: Increasing retirement gains by using an upside terminal wealth constraint

Catherine Donnelly, Russell Gerrard, Montserrat Guillen, Jens Perch Nielsen

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)
71 Downloads (Pure)

Abstract

We solve a portfolio selection problem of an investor with a deterministic savings plan who aims to have a target wealth value at retirement. The investor is an expected power utility-maximizer. The target wealth value is the maximum wealth that the investor can have at retirement.

By constraining the investor to have no more than the target wealth at retirement, we find that the lower quantiles of the terminal wealth distribution increase, so the risk of poor financial outcomes is reduced. The drawback of the optimal strategy is that the possibility of gains above the target wealth are eliminated.
Original languageEnglish
Pages (from-to)259-567
Number of pages9
JournalInsurance: Mathematics and Economics
Volume64
Early online date17 Jun 2015
DOIs
Publication statusPublished - Sep 2015

Keywords

  • Retirement planning
  • Retirement wealth distribution
  • Savings plan
  • Portfolio optimization
  • Stochastic control

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