Investment Strategies in Retirees’ Decumulation Phase

This thesis consists of three studies that share a common subject of investment strategies in a retiree’s decumulation phase. The importance of appropriate retirement
distribution plans that adequately cater for the risks in retirement is an integral component of retirement planning. The first study compares alternative withdrawal strategies in retirement to a life annuity benchmark using Australian data. By adopting the Epstein-Zin utility preferences, we are able to disentangle relative risk aversion (RRA) from elasticity of intertemporal substitution (EIS) and examine how retiree preferences are impacted by the means-tested age pension. For the second study, I derive the portfolio choice and consumption patterns for retirees with Hyperbolic Absolute Risk Aversion (HARA) utility who have bequest or capital preservation
needs and access to deferred life annuities. I find that investing in deferred annuities leads to significant welfare gains, that is, there is a real option to delay annuitisation
(RODA) for retirees at all risk aversion levels. Whilst risk averse retirees want to delay annuitising in retirement, they prefer a shorter delay to a longer one. Retirees
derive more utility in purchasing annuities with shorter deferral periods over longer periods and benefit from purchasing deferred annuities over self-annuitisation. The
final study compares the performance of the commonly nominated default retirement investment option, the lifecycle fund, to alternative investment strategies during the
retirees’ decumulation phase. Under diffrent shortfall risk measures, I find that balanced portfolios with constant exposure to stocks, stock dominated portfolios as well
as `reverse lifecycle’ portfolios that increase exposures to stocks over time consistently outperform the conventional lifecycle portfolio. Using a utility-of-terminal wealth
approach which allows for loss aversion as in prospect theory, I find the balanced portfolio to dominate the alternative strategies at low thresholds. With increasing
threshold levels, investment strategies with high constant stock allocations become dominant. The lifecycle portfolio is dominated by the `reverse lifecycle’ portfolio at
all threshold levels.