Multi-Period Optimal Investment Choice Post-Retirement With Inter-Temporal Restrictions In A Defined Contribution Pension Plan

This paper studies a multi-period portfolio selection problem during the post-retirement phase of a defined contribution pension plan. The retiree is allowed to defer the purchase of the annuity until the time of compulsory annuitization. A series of investment targets over time are set, and restrictions on the inter-temporal expected values of the portfolio are considered. We aim to minimize the accumulated variances from the time of retirement to the time of compulsory annuitization. Using the Lagrange multiplier technique and dynamic programming, we study in detail the existence of the optimal strategy and derive its closed-form expression. For comparison purposes, the explicit solution of the classical target-based model is also provided. The properties of the optimal investment strategy, the probabilities of achieving a worse or better pension at the time of compulsory annuitization and the bankruptcy probability are compared in detail under two models. The comparison shows that our model can greatly decrease the probability of achieving a worse pension at the compulsory time and can significantly increase the probability of achieving a better pension.