IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Optimal retirement consumption with a stochastic force of mortality

  • Huang, Huaxiong
  • Milevsky, Moshe A.
  • Salisbury, Thomas S.
Registered author(s):

    We extend the lifecycle model (LCM) of consumption over a random horizon (also known as the Yaari model) to a world in which (i) the force of mortality obeys a diffusion process as opposed to being deterministic, and (ii) consumers can adapt their consumption strategy to new information about their mortality rate (also known as health status) as it becomes available. In particular, we derive the optimal consumption rate and focus on the impact of mortality rate uncertainty versus simple lifetime uncertainty — assuming that the actuarial survival curves are initially identical — in the retirement phase where this risk plays a greater role.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0167668712000480
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 51 (2012)
    Issue (Month): 2 ()
    Pages: 282-291

    as
    in new window

    Handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:282-291
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
    2. Bauer Daniel & Börger Matthias & Ruß Jochen & Zwiesler Hans-Joachim, 2008. "The Volatility of Mortality," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 3(1), pages 1-29, September.
    3. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
    4. Leung, S.F., 1992. "Uncertain Lifetime, the Theory of the Consumer, and the Life Cycle Hypothesis," RCER Working Papers 323, University of Rochester - Center for Economic Research (RCER).
    5. Dahl, Mikkel, 2004. "Stochastic mortality in life insurance: market reserves and mortality-linked insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 35(1), pages 113-136, August.
    6. Menoncin, Francesco, 2008. "The role of longevity bonds in optimal portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 343-358, February.
    7. Bodie, Zvi & Detemple, Jerome B. & Otruba, Susanne & Walter, Stephan, 2004. "Optimal consumption-portfolio choices and retirement planning," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1115-1148, March.
    8. Villeneuve, Bertrand & Bommier, Antoine, 2012. "Risk Aversion and the Value of Risk to Life," Economics Papers from University Paris Dauphine 123456789/4812, Paris Dauphine University.
    9. Park, Myung-Ho, 2006. "An analytical solution to the inverse consumption function with liquidity constraints," Economics Letters, Elsevier, vol. 92(3), pages 389-394, September.
    10. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    11. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    12. Post Thomas, 2012. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Mortality," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 6(2), pages 1-26, June.
    13. Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 687-718.
    14. Richard, Scott F., 1975. "Optimal consumption, portfolio and life insurance rules for an uncertain lived individual in a continuous time model," Journal of Financial Economics, Elsevier, vol. 2(2), pages 187-203, June.
    15. Davies, James B, 1981. "Uncertain Lifetime, Consumption, and Dissaving in Retirement," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 561-77, June.
    16. Milevsky, Moshe A. & David Promislow, S., 2001. "Mortality derivatives and the option to annuitise," Insurance: Mathematics and Economics, Elsevier, vol. 29(3), pages 299-318, December.
    17. Wills, Samuel & Sherris, Michael, 2010. "Securitization, structuring and pricing of longevity risk," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 173-185, February.
    18. Kingston, Geoffrey & Thorp, Susan, 2005. "Annuitization and asset allocation with HARA utility," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(03), pages 225-248, November.
    19. Lachance, Marie-Eve, 2012. "Optimal onset and exhaustion of retirement savings in a life-cycle model," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(01), pages 21-52, January.
    20. Feigenbaum, James, 2008. "Can mortality risk explain the consumption hump?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 844-872, September.
    21. Levhari, David & Mirman, Leonard J, 1977. "Savings and Consumption with an Uncertain Horizon," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 265-81, April.
    22. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:282-291. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.