Optimal Allocation of Retirement Portfolios

Kevin Maritato, Morton Lane, Matthew Murphy, Stan Uryasev

Research output: Contribution to journalArticlepeer-review


A retiree with a savings account balance, but without a pension, is confronted with an important investment decision that has to satisfy two conflicting objectives. Without a pension, the function of the savings is to provide post-employment income to the retiree. At the same time, most retirees want to leave an estate to their heirs. Guaranteed income can be acquired by investing in an annuity. However, that decision takes funds away from investment alternatives that might grow the estate. The decision is made even more complicated because one does not know how long one will live. A long life expectancy may require more annuities, and a short life expectancy could promote more risky investments. However there are very mixed opinions about both strategies. A framework has been developed to assess consequences and the trade-offs of alternative investment strategies. We propose a stochastic programming model to frame this complicated problem. The objective is to maximize expected estate value, subject to cash outflow constraints. The model is motivated by the Markowitz mean-variance approach, but with risk measured by CVaR and additional sophisticated constraints. The cash outflow shortages are penalized in the objective function of the problem. We use the kernel method to build position adjustment functions that control how much is invested in each asset. These adjustments nonlinearly depend upon asset returns in previous years. A case study was conducted using two variations of the model. The parameters used in this case study correspond to a typical retirement situation. The case study shows that if the market forecasts are pessimistic, it is optimal to invest in an annuity. The case study results, codes, and data are posted on our website.
Original languageEnglish (US)
JournalJournal of Risk and Financial Management
Issue number2
StatePublished - Feb 1 2022


  • portfolio optimization
  • annuities
  • retirement allocation
  • CVaR
  • Conditional value at risk
  • risk management


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