Retirement Flexibility and Portfolio Choice

Jan Bonenkamp, Yvonne Adema and Lex Meijdam

No 182, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model. We analyse this interaction both in a partial-equilibrium and general-equilibrium setting. Retirement flexibility is often seen as a hedge against capital-market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened and under some conditions even turned around, if not only capital-market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general-equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure. Key words: retirement (in) flexibility, portfolio allocation, risk, intratemporal substitution elasticity JEL codes: E21, G11, J26

JEL-codes: E21 G11 J26 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-age, nep-dge and nep-mac
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