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Novel Utility-based Life Cycle Models to Optimise Income in Retirement in the Presence of Heterogeneous Preferences

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Listed:
  • Bonsoo Koo
  • Athanasios A. Pantelous
  • Yunxiao Wang

Abstract

The global shift towards defined-contribution pension schemes has been accompanied by asymmetric risks and new responsibilities for households to plan and fund effectively their own retirement over the years. In this study, expressing and combining preferences for consumption, investment, bequest, public pension entitlement and the choice of reverse mortgage products, we develop several utilitybased life cycle models to facilitate the complex decision-making process that retired households are required to follow to optimise their retirement income. This optimal policy is given in the form of either an analytical or a numerical solution using stochastic dynamic programming. The timing of this paper coincides with the launch of a reverse mortgage style loan, offered by the Australian federal government and allowing retired households to receive an income stream by taking out a loan against the equity in their home. Calibration is performed using real Australian household data.

Suggested Citation

  • Bonsoo Koo & Athanasios A. Pantelous & Yunxiao Wang, 2020. "Novel Utility-based Life Cycle Models to Optimise Income in Retirement in the Presence of Heterogeneous Preferences," Monash Econometrics and Business Statistics Working Papers 21/20, Monash University, Department of Econometrics and Business Statistics.
    • Handle: RePEc:msh:ebswps:2020-21
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    File URL: https://www.monash.edu/business/ebs/research/publications/ebs/wp21-2020.pdf
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    References listed on IDEAS

    as
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    4. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    Keywords

    risk management; stochastic optimal control; life cycle models; retirement income; reverse mortgage; defined contribution;
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