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Retirement Flexibility and Portfolio Choice

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  • Adema, Y.
  • Bonenkamp, J.
  • Meijdam, A.C.

    (Tilburg University, Center for Economic Research)

Abstract

This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model. We analyse this interaction both in a partial-equilibrium and general-equilibrium setting. Retirement flexibility is often seen as a hedge against capital-market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement fl exibility is weakened - and under some conditions even turned around - if not only capital-market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general-equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-077.

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Date of creation: 2011
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Handle: RePEc:dgr:kubcen:2011077

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Web page: http://center.uvt.nl

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Keywords: retirement (in)fl exibility; portfolio allocation; risk; intratemporal substitution elasticity;

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