Optimal asset allocation, consumption and retirement time with the variation in habitual persistence

Lin He, Zongxia Liang, Yilun Song and Qi Ye

Insurance: Mathematics and Economics, 2022, vol. 102, issue C, 188-202

Abstract: In this paper, we study the individual's optimal asset allocation, consumption and retirement time under habitual persistence. To depict the phenomenon that the individual feels equally satisfied with a lower habitual level and is more reluctant to change the habitual level after retirement, we assume that both the level and the sensitivity of the habitual consumption decline at the time of retirement. We establish the concise form of the habitual evolutions, and obtain the optimal retirement time and consumption policy based on martingale and duality methods. The optimal consumption experiences a sharp decline at retirement, but the excess consumption raises because of the reduced sensitivity of the habitual level. This result is consistent with the evidence observed in the “retirement consumption puzzle”. Particularly, the optimal retirement and consumption policies are balanced between the wealth effect and the habitual effect. Larger wealth increases consumption, and larger growth inertia (sensitivity) of the habitual level decreases consumption and brings forward the retirement time.

Keywords: Optimal retirement time; Retirement consumption puzzle; Habitual persistence; Optimal consumption; Martingale and duality methods (search for similar items in EconPapers)
JEL-codes: C61 G11 G22 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:102:y:2022:i:c:p:188-202

DOI: 10.1016/j.insmatheco.2021.10.004

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