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Optimal Portfolio Choice over the Life Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts

Author

Listed:
  • Jingjing Chai
  • Wolfram Horneff
  • Raimond Maurer
  • Olivia S. Mitchell

Abstract

This paper derives optimal lifecycle asset allocations for consumers who select work hours and retirement ages given uncertain labor income and investment returns. These shocks shape retirement and asset allocation patterns in complex ways: negative labor market shocks and high stock returns influence the young to work less and buy more annuities, and later, to retire early. This flexibility enhances welfare; our model also fits several important empirical stylized facts including the two peaks in retirement rates, the hump-shaped pattern of work hours, the sizeable discontinuity in consumption at retirement, and low annuity take-ups of older households. Copyright 2011, Oxford University Press.

Suggested Citation

  • Jingjing Chai & Wolfram Horneff & Raimond Maurer & Olivia S. Mitchell, 2011. "Optimal Portfolio Choice over the Life Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts," Review of Finance, European Finance Association, vol. 15(4), pages 875-907.
  • Handle: RePEc:oup:revfin:v:15:y:2011:i:4:p:875-907
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    File URL: http://hdl.handle.net/10.1093/rof/rfr016
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    Cited by:

    1. Kim, Hugh H. & Maurer, Raimond & Mitchell, Olivia S., 2013. "Time is money: Life cycle rational inertia and delegation of investment management," CFS Working Paper Series 2013/08, Center for Financial Studies (CFS).
    2. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla & Tatjana Schimetschek, 2014. "Will They Take the Money and Work? An Empirical Analysis of People's Willingness to Delay Claiming Social Security Benefits for a Lump Sum," NBER Working Papers 20614, National Bureau of Economic Research, Inc.
    3. Jeffrey Hoopes & Patrick Langetieg & Stefan Nagel & Daniel Reck & Joel Slemrod & Bryan Stuart, 2016. "Who Sold During the Crash of 2008-9? Evidence from Tax-Return Data on Daily Sales of Stock," NBER Working Papers 22209, National Bureau of Economic Research, Inc.
    4. Blake, David & Wright, Douglas & Zhang, Yumeng, 2014. "Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 105-124.
    5. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 32.
    6. repec:eee:hapoch:v1_567 is not listed on IDEAS
    7. Steinorth, Petra & Mitchell, Olivia S., 2015. "Valuing variable annuities with guaranteed minimum lifetime withdrawal benefits," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 246-258.
    8. Antoine Bommier & François Grand, 2014. "Too risk averse to purchase insurance?," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 135-166, April.
    9. Jingjing Chai & Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla, 2012. "Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?," Working Papers wp266, University of Michigan, Michigan Retirement Research Center.
    10. repec:red:issued:16-22 is not listed on IDEAS
    11. Urvi Neelakantan & Felicia Ionescu & Kartik Athreya, 2015. "Learn Now, Save Later: College and Household Portfolios," 2015 Meeting Papers 804, Society for Economic Dynamics.
    12. Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia Mitchell, 2012. "Do Consumers Know How to Value Annuities? Complexity as a Barrier to Annuitization," Working Papers WR-924-SSA, RAND Corporation.
    13. Schendel, Lorenz S., 2014. "Consumption-investment problems with stochastic mortality risk," SAFE Working Paper Series 43, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    14. Lusardi, Annamaria & Mitchell, Olivia S. & Oggero, Noemi, 2017. "Debt and financial vulnerability on the verge of retirement," CFS Working Paper Series 574, Center for Financial Studies (CFS).
    15. Heijdra, Ben J. & Mierau, Jochen O., 2012. "The individual life-cycle, annuity market imperfections and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 876-890.
    16. Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S., 2017. "How persistent low expected returns alter optimal life cycle saving, investment, and retirement behavior," SAFE Working Paper Series 190, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    17. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph & Schimetschek, Tatjana, 2017. "Optimal social security claiming behavior under lump sum incentives: Theory and evidence," SAFE Working Paper Series 164, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    18. Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2017. "A Life-Cycle Model with Unemployment Traps," Working papers 041, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    19. Frank N. Caliendo & Aspen Gorry & Sita Slavov, 2017. "Survival Ambiguity and Welfare," NBER Working Papers 23648, National Bureau of Economic Research, Inc.
    20. Lim, Byung Hwa & Kwak, Minsuk, 2016. "Bequest motive and incentive to retire: Consumption, investment, retirement, and life insurance strategies," Finance Research Letters, Elsevier, vol. 16(C), pages 19-27.
    21. Jang, Bong-Gyu & Lee, Ho-Seok, 2016. "Retirement with risk aversion change and borrowing constraints," Finance Research Letters, Elsevier, vol. 16(C), pages 112-124.
    22. Nan Zhu & Daniel Bauer, 2013. "Coherent Pricing of Life Settlements Under Asymmetric Information," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 827-851, September.
    23. Kim, Hugh Hoikwang & Maurer, Raimond & Mitchell, Olivia S., 2016. "Time is money: Rational life cycle inertia and the delegation of investment management," Journal of Financial Economics, Elsevier, vol. 121(2), pages 427-447.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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