Business Economics and Public Policy Papers
Document Type
Journal Article
Date of this Version
7-2011
Publication Source
Review of Finance
Volume
15
Issue
4
Start Page
875
Last Page
907
DOI
10.1093/rof/rfr016
Abstract
We derive optimal life-cycle asset allocations for a consumer who selects hours of work and retirement age, given uncertain labor income and investment returns. Shocks in labor income and capital markets interact to influence retirement and asset allocation patterns in complex ways. When workers can adjust work hours and retirement flexibly, and they also have access to lifetime payout markets, they will respond to negative labor market shocks and high stock returns by working less while young, buying more annuities, and retiring early; this flexibility enhances welfare. Further, our model is able to fit several important empirical stylized facts, such as the two peaks in retirement rates, the hump-shaped pattern of work hours, the sizeable discontinuity in consumption at retirement, and the low annuity take-ups of older households.
Recommended Citation
Chai, J., Horneff, W. J., Maurer, R., & Mitchell, O. S. (2011). Optimal Portfolio Choice over the Life-Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts. Review of Finance, 15 (4), 875-907. http://dx.doi.org/10.1093/rof/rfr016
Date Posted: 27 November 2017
This document has been peer reviewed.