The Effect of Selecting the Type of Objective Function on Individual Default in Individual Retirement Account (Case study: Iran)
Subject Areas : Financial Knowledge of Securities Analysis
Ezatollah Abbasian
1
(Associate Professor in Economics, Department of economics, Bu Ali Sina University, Hamedan, Iran.)
Mohammad Ali Kamali
2
(PhD Student in Financial Management, Management Faculty, University of Alborz campous Tehran, Iran.)
Reza Tehrani
3
(Professor in financial management, faculty of management, University of Tehran, Tehran, Iran.)
Mojtaba Mirlohi
4
(Assistant professor in financial management, University of Shahroud, shahroud, Iran.)
Keywords: Optimization, Retirement, Simulation, Dynamic Planning, Bootstrap Method,
Abstract :
A retired person faces two major risks: life-long risk and investment risk. In this paper, we examine the effect of decision-making policy on the amount of defaults by using two objective functions for wealth at retirement time. The expressed policies relate to the return on target markets for investment and the discount rate in the economy. In the modeling of these policies, a dynamic programming approach combined with historical simulation has been used. The results indicate the importance of selecting the objective function. Given the severe economic fluctuations in the country, as well as the need for greater wealth accumulation and greater participation in controlling economic fluctuations, the policy of focusing on pension with the lower wealth in retirement period as an optimal policy - because of the acceptance of lower risk for a certain level of wealth - and more use of the wealth function during retirement time is suggested.
* Antolín, P., Payet, S., Yermo, J., 2010. Assessing default investment strategies in defined contribution pension plans. In: OECD Working Papers on Finance, Insurance and Private Pensions. No. 2. OECD Publishing. Association of Superannuation Funds of Australia, 2014. The ASFA Retirement Standard. December 2013. Australian Government Actuary, 2009. Australian Life Tables 2005-07.
* Basu, A.K., Byrne, A., Drew, M.E., 2011. Dynamic lifecycle strategies for target date. J. Portf. Manag. 37 (2), 83–96.
* Blake, D., Wright, D., Zhang, Y., 2011. Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion. J. Econom. Dynam. Control 37 (1), 195–209.
* Butt, A., Deng, Z., 2012. Investment strategies in retirement: in the presence of a means-tested government pension. J. Pension Econ. Finance 11 (2), 151–181.
* Butt, A., Khemka, G., 2015. The effect of objective formulation on retirement decision making. J. Insurance Math. Econom. 64, 385–395.
* Chen, Z., Li, Z., Zeng, Y., Sun, J., 2017. Asset allocation under loss aversion and minimum performance constraint in a DC pension plan with inflation risk. Insurance Math. Econom. 75, 137-150.
* Finke, R., Wolf, R. (Eds.), 2013. Allianz International Pensions Country Factsheets 2013. Alliance SE.
* Gerrard, R., Haberman, S., Vigna, E., 2004. Optimal investment choices postretirement in a defined contribution pension scheme. Insurance Math. Econom. 35, 321–342.
* Giamouridis, D., Sakkas, A., Tessaromatis, N., 2017. Dynamic asset allocation with liabilities. European Financial Management. 23(2), 254-291.
* Haberman, S., Vigna, E., 2002. Optimal investment strategies and risk measures in defined contribution pension schemes. Insurance Math. Econom. 31, 35–69.
* Horneff, V., Mitchell, O.S., Maurer, R., Rogalla, R., 2013. Optimal life cycle portfolio choice with variable annuities offering liquidity and investment downside protection. Pension Research Council, Working Paper 2013-04.
* Kopcke, R.W., Webb, A., Hurwitz, J., Li, Z., 2013. Rethinking optimal wealth accumulation and decumulation in the wake of the financial crisis. Centre for Retirement Research Working Paper 2013-1.
* Korn, R., Siu, T.K., Zhang, A., 2011. Asset allocation for a DC pension fund under regime switching environment. Eur. Actuar. J. 1 (2), S362–S377.
* Kremer, A., Liese, F., Homölle, S., Clausen, J., 2014. Optimal consumption and portfolio choice of retirees with longevity risk. J. Pension Econ. Finance 13 (3), 227–249.
* Mladina, P. 2016., Optimal Lifetime Asset Allocation with Goals-Based, Lifecycle Glide Paths. J. Wealth Management 19(1), 10-22.
* Pirvu, T.A., Zhang, H., 2012., Optimal investment, consumption and life insurance under mean-reverting returns: The complete market solution. Insurance Math. Econom. 51, 303–309. Retirement Incomes Working Group, 2013. Post retirement funding in Australia. Presented to the Actuaries Summit, 20–21 May, 2013.
* Scott, L. and S. Cavaglia., 2017., A Wealth Management Perspective on Factor Premia and the Value of Downside Protection. J. Portfolio Management 43(3), 33-41.
* Shen, Y. and M. Sherris., 2018., Lifetime asset allocation with idiosyncratic and systematic mortality risks., Scandinavian Actuarial Journal 2018(4), 294-327.
* Steinorth, P., Mitchell, O.S., 2012. Valuing variable annuities with guaranteed minimum lifetime withdrawal benefits. Pension Research Council, Working Paper 2012-03.
* Van Wyk, B., 2012. Introducing a retirement benefit target. Presented to the Joint IACA, IAAHS and PBSS Colloquium, Hong Kong, 2012.
* Vigna, E., Haberman, S., 2001. Optimal investment strategy for defined contribution pension schemes. Insurance Math. Econom. 28, 233–262.
* Yao, H., Lai, Y., Ma, Q., Jian, M., 2014. Asset allocation for a DC pension fund with stochastic income and mortality risk: A multi-period mean–variance framework. Insurance Math. Econom. 54, 84–92.
* Yao, H., Li, X., Hao, Z., Li, Y., 2016., Multi-period defined contribution pension funds investment management with regime-switching and mortality risk., Insurance Math. Econom. 71, 103-113.
* Zeng, Y., Li, D., Chen, Z., Yang, Z., 2018., Ambiguity aversion and optimal derivative-based pension investment with stochastic income and volatility. J. Economic Dynamics and Control 88, 70-103
_||_