Fixed and variable longevity income annuities in defined contribution plans: Optimal retirement portfolios taking social security into account

Abstract

This paper investigates retirees' optimal purchases of fixed and variable longevity income annuities using their defined contribution (DC) plan assets and given their expected social security benefits. As an alternative, we also evaluate using plan assets to boost social security benefits through delayed claiming. Using a calibrated life-cycle model, we determine that including deferred income annuities in DC accounts is welfare-enhancing for all sex/education groups examined. We also show that providing access to well-designed variable deferred annuities with some equity exposure further enhances retiree well-being, compared to having access only to fixed annuities. Nevertheless, for those facing the highest mortality rates, delaying claiming social security is mostly preferred, whereas those anticipating living longer than average will benefit more from using accumulated DC plan assets to purchase deferred annuities.