 Dynamic asset allocation with consumption ratcheting post retirementJunkee Jeon and Kyunghyun Park Applied Mathematics and Computation, 2020, vol. 385, issue C Abstract: In this paper, we propose a model for optimal consumption/investment and retirement that considers post retirement consumption ratcheting. Specifically, we study a model in which an economic agent has a retirement option and does not tolerate a decline in consumption post retirement. The agent receives a constant labor income but suffers utility loss from the labor before retirement. By considering variational inequality arising from the optimal stopping problem, we derive a closed-form solution for the optimal policies and retirement wealth threshold. We show that this post-retirement spending power raises the optimal retirement wealth threshold, forcing the agent to retire later. By endogenously deriving the initial consumption process at the moment of retirement time, we show that the agent’s consumption flow jumps down at the moment of retirement, which is related to the ``retirement-consumption puzzle''. Moreover, we find that the agent tends to take less risk during his entire lifespan. Keywords: Consumption ratcheting; Optimal consumption/investment; Optimal retirement; Optimal stopping problem; Variational inequality (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:385:y:2020:i:c:s0096300320303799 DOI: 10.1016/j.amc.2020.125418 Access Statistics for this article Applied Mathematics and Computation is currently edited by Theodore Simos More articles in Applied Mathematics and Computation from Elsevier |
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