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.

Included in

Finance Commons

Share

COinS
 

Date Posted: 27 November 2017

This document has been peer reviewed.