Optimal investment, heterogeneous consumption, and retirement with pension income

This study analyzes lifetime decisions on investment, heterogeneous consumption, and retirement timing in the presence of pension income. Using the duality method, we derive optimal wealth, investment–consumption strategies, and the voluntary retirement boundary, and conduct numerical simulations. Three main findings emerge. (i) Pension benefits significantly affect retirement timing. Higher pension payments induce earlier voluntary retirement, and this effect strengthens when contribution burdens rise during employment. (ii) Increasing pension contributions reduce both risky-asset investment and total consumption. While overall consumption declines, the adjustment is asymmetric: basic consumption remains relatively inelastic, whereas luxury consumption contracts sharply. (iii) The decline in investment–consumption is more pronounced when pensions are financed through direct income reductions than through higher labor costs. However, once contributions exceed a critical threshold, the loss of surplus income becomes the dominant determinant of financial behavior, regardless of the financing channel. We conclude by discussing implications for South Korea’s ongoing pension reform and retirement planning.