Presentation – Henk Keffert

Speaker: Henk Keffert, Tilburg University

Title: Optimal investment and consumption for retired couples with habit formation

Abstract: In this presentation, we will discuss optimal investment and consumption decisions for retired couples with habit formation preferences. We incorporate life-time uncertainty for both members of the couple, investment in a risky and risk-free asset, retirement wealth that consists of liquid wealth and annuities, and internal additive habit formation preferences.

Current practice in the Netherlands is that the partner pension payment is typically 70% of the annuity benefits originally paid to the deceased spouse. Our results suggest that in many situations this can lead to an increase in consumption of the surviving spouse, which indicates that 70% is higher than what is needed to maintain the same standard of living for the surviving spouse. Factors that influence the size of this consumption change are the economies of scale of being in a couple and the division of annuity benefits between the partners. On the other hand, in cases where annuity income is highly asymmetric between the two partners, percentages lower than 70% can lead to considerable welfare losses. Compared to power utility preferences, couples with habit formation invest less in the risky asset, and consumption changes after the death of a partner are smoother.