Optimal Retirement Portfolios with Fixed and Variable Longevity Annuities in Defined Contribution Plans taking Social Security into Account

This paper examines how two instruments—annuities with lifelong benefits purchased using defined contribution (DC) plan assets, and social security annuities—should be considered jointly to optimize household lifetime wellbeing. Understanding how these interact is of key importance in order to generate efficient retirement portfolios. Additionally, there is likely to be substantial heterogeneity in the demand for longevity annuities across the retiree population, depending on their assets inside and outside tax-qualified retirement plans, their mortality assumptions, and their accrued Social Security benefits. Therefore, as an alternative, we also evaluate using plan assets to boost social security benefits through delayed claiming. We determine that including deferred income annuities (DIAs) in DC accounts is welfare enhancing for all sex/education groups examined. We also show that providing access to variable deferred income annuities with some equity exposure (similar to participating annuities) further enhances retiree wellbeing, compared to having access only to fixed annuities. Nevertheless, for the least educated, delaying claiming social security benefits is preferred, whereas the most educated benefit more from using accumulated DC plan assets to purchase deferred annuities