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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
Wolfram Horneff
Raimond Maurer
Olivia S. Mitchell

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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, if 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15079.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15079

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Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D14 - Microeconomics - - Household Behavior - - - Personal Finance
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped
J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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This page was last updated on 2009-11-21.

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