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Lifetime consumption and investment with housing, deferred annuities and home equity release

Jang, C., Owadally, I. ORCID: 0000-0002-0830-3554, Clare, A. ORCID: 0000-0002-4180-6778 and Kashif, M. (2021). Lifetime consumption and investment with housing, deferred annuities and home equity release. Quantitative Finance,

Abstract

We develop a life-cycle optimal investment and consumption model with deferred annuities, housing, mortgages and home equity release. The investor can hold cash, bonds, stocks, annuities and can invest in housing, through renting, purchasing, or a mix of both, with access to variable-rate mortgages. In retirement, the investor can access his housing equity through a form of home equity release called a home reversion contract. Transaction costs, taxes and management fees are explicitly included. The investor’s risk preferences are represented by standard power utility derived from housing and nonhousing consumption, both before and after retirement, and from bequest. We use multi-stage stochastic programming to solve the optimization problem numerically. Our results show that both non-housing and housing consumption may be higher in retirement when deferred annuities and home reversion are available than when they are absent. The bequest motive has little effect on home reversion and results in a small reduction in overall annuitization.

Publication Type: Article
Additional Information: This is an Accepted Manuscript of an article to be published by Taylor & Francis in Quantitative Finance, to be available online: http://www.tandf.co.uk/journals/titles/14697688.asp
Publisher Keywords: Stochastic programming; Retirement planning; Home equity reversion; Deferred annuities
Subjects: H Social Sciences > HG Finance
Departments: Business School > Finance
Date available in CRO: 02 Aug 2021 08:32
Date deposited: 2 August 2021
Date of acceptance: 1 August 2021
URI: https://openaccess.city.ac.uk/id/eprint/26535
[img] Text - Accepted Version
This document is not freely accessible due to copyright restrictions.

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