Actuarial studies seminar - Associate Professor Yang Shen - UNSW

A seminar by Associate Professor Yang Shen from UNSW

Title: Retirement Decumulation with Loss-Averse Mental Accounts 

Abstract: Retired households draw down wealth slowly, adjust consumption gradually to resource shocks, and have less appetite for private annuities. We develop a continuous-time retirement decumulation model that accounts for these patterns through reference-dependent preferences over two mental accounts. Consumption is evaluated relative to an endogenous living-standard reference in the consumption account, whereas bequeathable liquid wealth is evaluated relative to a separate reference in the bequest account. This structure creates a composition channel: annuitization raises survival-contingent resources for consumption but reduces wealth in the bequest account. We derive closed-form policies for consumption, risky investment, and life-contingent positions. In the numerical analysis, the consumption-account mechanism dampens the contemporaneous consumption response to resource shocks while lagged resource changes remain predictive of consumption growth, consistent with empirical evidence on excess smoothness and excess sensitivity for consumption. Loss aversion in the bequest account slows wealth decumulation and suppresses private annuity demand, allowing the model to address the slow-decumulation and annuity puzzles within a common framework. The portfolio decomposition further shows that the contributions of the consumption and bequest accounts to risky investment vary across return states. Finally, the welfare analysis establishes that limited annuitization can coexist with economically meaningful insurance value from annuity access.

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