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Forced Retirement Risk and Portfolio Choice

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Abstract

The literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using the Health and Retirement Study data, this paper finds the forced retirement risk to be significant and also highly correlated with stock market fluctuations. A life-cycle portfolio choice model with the estimated forced retirement risk shows that the labor income of those subject to the risk of forced retirement becomes stock-like as individuals approach retirement. Therefore, contrary to conventional wisdom, those who are still working but close to retirement should have a lower share of risky assets in their financial portfolios than retirees do. Given that most financial assets are held by middle-aged households, this finding gives an alternative explanation to the risk premium puzzle.

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  • Guodong Chen & Minjoon Lee & Tong-yob Nam, 2018. "Forced Retirement Risk and Portfolio Choice," Carleton Economic Papers 18-06, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:18-06
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    Cited by:

    1. Valentinas Rudys, 2023. "How does retirement affect optimal life cycle portfolio allocation between stocks and bonds?," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 212-224, May.

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    More about this item

    Keywords

    Forced Retirement; Portfolio Choice; the Risk Premium Puzzle;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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