Abstract
I solve the optimal consumption and portfolio choice problem of a retiree who is endowed with both liquid assets and pre-annuitized wealth in Social Security. The retiree faces an investment menu including an equity index, a risk-free bond, a life insurance and a variable annuity. I find that the added benefit of annuitization timing can be valuable for variable annuity. The utility loss due to the irreversibility of pre-annuitized wealth can be big, and a transition from the current pay-as-you-go Social Security system to a personal investmentbased system benefits retirees with high fraction of pre-annuitized wealth the most. Purchasing life insurance is effective in reducing the adverse effect of over-annuitization only for impatient retirees with low Elasticity of Intergenerational Substitution. Interestingly, the utility loss due to the irreversibility of a future life annuity purchase is small for the retiree.
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