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

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Listed:
  • Chai, Jingjing

    (Goethe University)

  • Horneff, Wolfram

    (Goethe University)

  • Maurer, Raimond

    (Goethe University)

  • Mitchell, Olivia S.

    (University of PA)

Abstract

We derive optimal life-cycle asset allocations for a consumer who selects hours of work and retirement age, given uncertain labor income and investment returns. Shocks in labor income and capital markets interact to influence retirement and asset allocation patterns in complex ways. When workers can adjust work hours and retirement flexibly, and they also have access to lifetime payout markets, they will respond to negative labor market shocks and high stock returns by working less while young, buying more annuities, and retiring early; this flexibility enhances welfare. Further, our model is able to fit several important empirical stylized facts, such as the two peaks in retirement rates, the hump-shaped pattern of work hours, the sizeable discontinuity in consumption at retirement, and the low annuity take-ups of older households.

Suggested Citation

  • Chai, Jingjing & Horneff, Wolfram & Maurer, Raimond & Mitchell, Olivia S., 2011. "Optimal Portfolio Choice over the Life-Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts," Working Papers 11-43, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-43
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    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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