Retirement Planning with Minimum Guarantees for Both Beneficiaries and Fund Managers

Abstract

This article studies a retirement planning problem from a new perspective in which a retiree delegates an initial lump sum to a professional fund manager. The fund is managed dynamically to deliver lifelong benefits while satisfying a guarantee that, at all times, wealth remains above a prescribed solvency level and the benefit rate remains above a minimum level. We formulate this problem as a continuous-time stochastic control model, in which the controls are the benefit rate and the portfolio allocation, and the objective incorporates general utility functions over benefits, management fees, and terminal bequest. Conventional approaches such as standard viscosity solution and martingale methods are not immediately applicable here due to the simultaneous influence of (i) the control variable nature of the benefit rate; (ii) the guarantee constraints; and (iii) the running wealth-dependent utility. We develop a new approach that deals directly with the associated fully nonlinear Hamilton-Jacobi-Bellman equation and establish the unique existence of a classical solution. One particular trick for resolving this equation is to apply an intricate transform that diverts the former to a semilinear auxiliary equation. A major contribution is to establish the existence of the solution to the auxiliary equation and characterize its precise growth, derivative, and boundary behavior. These results are crucial for establishing the verification theorems and deriving the optimal strategy. Besides, numerical experiments indicate that guarantee constraints induce more conservative policies, particularly at low wealth levels, while providing effective downside protection for both wealth and benefits. The associated well-being loss relative to the unconstrained framework remains small, suggesting that incorporating guarantees into retirement products is practically appealing.