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

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  • Jingjing Chai
  • Wolfram Horneff
  • Raimond Maurer
  • Olivia S. Mitchell

Abstract

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. Copyright 2011, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 15 (2011)
Issue (Month): 4 ()
Pages: 875-907

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Handle: RePEc:oup:revfin:v:15:y:2011:i:4:p:875-907

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Cited by:
  1. Antoine Bommier & Fran├žois Grand, 2014. "Too risk averse to purchase insurance?," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 135-166, April.
  2. Kim, Hugh H. & Maurer, Raimond & Mitchell, Olivia S., 2013. "Time is money: Life cycle rational inertia and delegation of investment management," CFS Working Paper Series 2013/08, Center for Financial Studies (CFS).
  3. Heijdra, Ben J. & Mierau, Jochen O., 2012. "The individual life-cycle, annuity market imperfections and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 876-890.
  4. Blake, David & Wright, Douglas & Zhang, Yumeng, 2014. "Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 105-124.
  5. Jingjing Chai & Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla, 2013. "Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?," NBER Working Papers 19032, National Bureau of Economic Research, Inc.
  6. Schendel, Lorenz S., 2014. "Consumption-investment problems with stochastic mortality risk," SAFE Working Paper Series 43, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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