M. Zaki Khoransee
Abstract
We consider two ways for a retiree to obtain a pension from a retirement fund: through the purchase of a whole life annuity providing a level monetary income; and through the withdrawal of income from a fund invested in equities. Deterministic and stochastic models are used to assess the risks and benefits associated with each approach. In each case the projected cash flows are compared with those from a whole life annuity providing an income linked to price inflation. We conclude that, although each of the two options considered involves significant risks, each method may be attractive to certain groups of pensioners, particularly those with additional savings held outside the retirement fund.
Key words and phrases: index-linked, inflation, equity portfolio, sinking fund, break-even duration
M. Zaki Khoransee