Creating an efficient annuity basket : application of international portfolio theory to life annuities.

Abstract

This research paper aims to introduce the use of Life Annuities as a retirement tool for the general population. Declining birth rates and lower mortality have resulted in an aging population. Planning for retirement becomes increasingly important as the likelihood of outliving one’s assets increases due to higher life expectancy brought about by medical advancement. The benefits and features of Life Annuities are introduced together with the different forms of risks involved, from both perspectives of the insurer and annuitant. The presence of bequest motive also affects the demand for annuities, particularly in Asian societies which are closer to an agricultural background. The recent developments in the new government-run compulsory annuity plan, CPF Life, as well as annuity plans from several overseas annuity markets are discussed. Hypothetical scenarios were constructed to compare the internal rate of return offered by the various annuity plans treating the accumulation and decumulation phase of the annuity as cash inflows and outflows of a project. The features and returns were tabulated to provide a general view of the annuity plans in deciding the optimal composition.