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Optimal retirement consumption with a stochastic force of mortality

  • Huang, Huaxiong
  • Milevsky, Moshe A.
  • Salisbury, Thomas S.
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167668712000480
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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

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

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    Handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:282-291
    DOI: 10.1016/j.insmatheco.2012.03.013
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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