Ruin Problem In Retirement Under Stochastic Return Rate And Mortality Rate And Its Applications

Feng Li successfully defended his M.Sc. project entitled "Ruin Problem In Retirement Under Stochastic Return Rate And Mortality Rate And Its Applications" on 4 April 2008.

Retirees face a difficult choice between annuitization from insurance firms and self-management or so-called self-annuitization. Self-annuitization could provide a higher consumption by investing more assets on equity market but with a risk that retirees may outlive the income from their self-managed assets. Using the Ornstein-Uhlenbeck stochastic model, also called the Vasicek model, for the rate of return, we focus our study on the ruin probability in retirement. We show how asset mix, initial rate of return, and gender impact the ruin probability in retirement. We derive a recursive formula to calculate an approximate distribution for the present value of the life annuity function under our stochastic model. Finally, we use our model to illustrate how a VaR technique can help determine the optimal consumption for a retiree with a certain tolerance to ruin under different retirement goals.

This type of interdisciplinary work is a hallmark of our program in Applied Statistics at Simon Fraser University. For more information, please contact Feng Li (fengl@sfu.ca) or his supervisor Gary Parker (gparker@stat.sfu.ca), Department of Statistics and Actuarial Science.

2008-04-04