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Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts

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Author Info

  • Jingjing Chai

    (Goethe University)

  • Wolfram Horneff

    (Goethe University)

  • Raimond Maurer

    (Goethe University)

  • Olivia S. Mitchell

    (The Wharton School)

Abstract

This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples’ equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, when we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.

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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp204.

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Length: 34 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:mrr:papers:wp204

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Cited by:
  1. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla, 2010. "The Effect of Uncertain Labor Income and Social Security on Life-cycle Portfolios," NBER Working Papers 15682, National Bureau of Economic Research, Inc.
  2. repec:diw:diwfin:diwfin04050 is not listed on IDEAS
  3. Jingjing Chai & Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla, 2011. "Lifecycle Impacts of the Financial and Economic Crisis on Household Optimal Consumption, Portfolio Choice, and Labor Supply," NBER Working Papers 17134, National Bureau of Economic Research, Inc.
  4. Motohiro Yogo, 2008. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets," 2008 Meeting Papers 63, Society for Economic Dynamics.

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