Optimal asset allocation in life annuities: a note

In this note, we derive the optimal utility-maximizing asset allocation between a risky and risk-free asset within a variable annuity (VA) contract, which is a US-based savings and decumulation investment product. We are interested in the interaction between financial risk, mortality risk and consumption, towards the end of the life cycle. Our main result is that for constant relative risk aversion (CRRA) preferences and geometric Brownian motion (GBM) dynamics, the optimal asset allocation during the annuity decumulation (payout) phase is identical to the accumulation (savings) phase, which is the classical Merton [J. Econ. Theory 3 (1971) 373] solution.