Retirement Flexibility and Portfolio Choice in General Equilibrium

Yvonne Adema, Jan Bonenkamp and Lex Meijdam
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Jan Bonenkamp: CPB Netherlands Bureau for Economic Policy Analysis, and Netspar

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model of a closed economy. 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.

Keywords: portfolio choice; retirement (in)flexibility; productivity and depreciation risk; intratemporal substitution; general equilibrium (search for similar items in EconPapers)
JEL-codes: E21 G11 J26 (search for similar items in EconPapers)
Date: 2011-02-17
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20110038

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