Journal of Pension Economics and Finance
- Journal of Pension Economics and Finance / Volume 11 / Issue 02 / April 2012, pp 285-309
- Copyright © Cambridge University Press 2011
- DOI: http://dx.doi.org/10.1017/S1474747211000217 (About DOI), Published online: 18 May 2011
Articles
Comonotonic approximations for the probability of lifetime ruin*
KOEN VAN WEERTa1, JAN DHAENEa2a3 and MARC GOOVAERTSa4a5
a1 Department of Accountancy, Finance and Insurance, K.U.Leuven, Naamsestraat 69, B-3000 Leuven, Belgium (e-mail: koen.vanweert@econ.kuleuven.be)
a2 Department of Accountancy, Finance and Insurance, K.U.Leuven, Naamsestraat 69, B-3000 Leuven, Belgium
a3 Department of Quantitative Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands
a4 Department of Accountancy, Finance and Insurance, K.U.Leuven, Naamsestraat 69, B-3000 Leuven, Belgium
a5 Department of Quantitative Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands
Abstract
This paper addresses the issue of lifetime ruin, which is defined as running out of money before death. Taking into account the random nature of the remaining lifetime, we discuss how a retiree should invest in order to avoid lifetime ruin. We also discuss the conditional time of lifetime ruin and the notion of bequest or wealth at death.
Using analytical approximations based on comonotonicity, we provide a new approach which is easy to understand and leads to very accurate results without computationally complex calculations. Our analytical approach avoids simulation, which allows to solve very general optimal portfolio selection problems.
(Online publication May 18 2011)
Footnotes
* The authors acknowledge the financial support by the Onderzoeksfonds K.U.Leuven (GOA/07: Risk Modeling and Valuation of Insurance and Financial Cash Flows, with Applications to Pricing, Provisioning and Solvency).
