Variable annuities versus mutual funds

a Monte-Carlo analysis of the options

Authors

  • Moshe Arye Milevsky Finance Department, Schulich School of Business, York University, 4700 Keele Street, Toronto, Ont., Canada M3J 1P3
  • Kamphol Panyagometh The Individual Finance and Insurance Decision (IFID) Centre, Toronto, Ont., Canada M3J 1P3

DOI:

https://doi.org/10.1016/S1057-0810(02)00101-4

Keywords:

Retirement savings, Taxation, Monte-Carlo simulation, Financial economics, Insurance

Abstract

Mutual funds and variable annuities are similar instruments that differ mainly in their tax treatment. Their relative appeal is the subject of intense debate in the industry. This paper contributes to the literature by quantifying the impact of investment return uncertainty when comparing the two. We focus on the embedded tax options using Monte-Carlo simulations. We conclude that although low-cost variable annuities are superior to low-cost mutual funds over long time horizons, the critical threshold is at least 10 years for typical levels of risk aversion. If, however, one ignores the tax options, the erroneous break-even horizon drops to 5 years. Copyright 2001 Published by Elsevier Science Inc.

Downloads

Published

2001-12-30

How to Cite

Milevsky, M. A., & Panyagometh, K. (2001). Variable annuities versus mutual funds: a Monte-Carlo analysis of the options. Financial Services Review, 10(1-4), 145–161. https://doi.org/10.1016/S1057-0810(02)00101-4

Issue

Vol. 10 No. 1-4 (2001): Financial Services Review

Section

New Original Submission

License

Copyright (c) 2001 Elsevier Science Inc.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.