Faculty of Economics and Business Administration Publications Database

Optimal Portfolio Choice over the Life-Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts

Chai, Jingjing
Horneff, Wolfram J.
Mitchell, Olivia S.
Volume: 15
Number: 4
Pages: 875 - 907
Month: October
ISSN-Print: 1572-3097
Link External Source: Online Version
Year: 2011

This paper derives optimal lifecycle asset allocations for consumers who select work hours and retirement ages given uncertain labor income and investment returns. These shocks shape retirement and asset allocation patterns in complex ways: negative labor market shocks and high stock returns influence the young to work less and buy more annuities, and later, to retire early. This flexibility enhances welfare; our model also fits several important empirical stylized facts including the two peaks in retirement rates, the hump-shaped pattern of work hours, the sizeable discontinuity in consumption at retirement, and low annuity take-ups of older households.