Optimal Strategies for Retirees in Australia With Realistic Risk Transfer

Abstract

We investigate optimal investment and drawdown decisions for Australian retirees, allowing for a range of risk transferring options that could be implemented by superannuation funds. Retirees can allocate their wealth between a life annuity, deferred life annuity, and growth and defensive portfolios in an account-based pension. The preferred asset mix varies significantly with balance and home ownership, and preferences as modelled using both loss aversion and constant relative risk aversion utility. We find that strong loss aversion leads to hedging strategies to secure the target consumption, as reflected in high desire for annuities and subsequent asset allocation and drawdown decisions. Desire for annuities also emerges under risk aversion to both smooth consumption and limit its decline after exhaustion of the account-based pension. We also highlight interactions between the Age Pension and the decisions of Australian retirees. Our results have implications for the design of comprehensive income products for retirement in the Australian market.