Optimal investment for a retirement plan with deferred annuities allowing for inflation and labour income risk

We construct an optimal investment portfolio model for individual investor saving in a retirement plan. The earns stochastic labour income with both permanent and temporary shocks, has access to equity, conventional bond, inflation-indexed bond cash, as well two types of deferred annuities: nominal inflation-protected. objective function consists power utility terms real from the annuities bequest remaining wealth tradable securities. Asset returns are represented by vector autoregressive underpinned Nelson–Siegel yield curves. optimization problem is solved numerically using multi-stage programming hybrid scenario structure combining tree fans. Our numerical results show that bought early increasing amounts during working lifetime investor, risk declining age. Welfare diminished 40% if not available. Inflation-protected marginally more important presence risk, but cheaper alternative yields low or negative. Portfolio composition annuity allocation vary depending on financial market expectations, our central result about importance robust variety conditions.