Optimal retirement consumption with a stochastic force of mortality

Huaxiong Huang, Moshe Milevsky and Thomas S. Salisbury

Insurance: Mathematics and Economics, 2012, vol. 51, issue 2, 282-291

Abstract: We extend the lifecycle model (LCM) of consumption over a random horizon (also known as the Yaari model) to a world in which (i) the force of mortality obeys a diffusion process as opposed to being deterministic, and (ii) consumers can adapt their consumption strategy to new information about their mortality rate (also known as health status) as it becomes available. In particular, we derive the optimal consumption rate and focus on the impact of mortality rate uncertainty versus simple lifetime uncertainty — assuming that the actuarial survival curves are initially identical — in the retirement phase where this risk plays a greater role.

Keywords: Lifecycle consumption; Stochastic mortality; Survival curve matching (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:51:y:2012:i:2:p:282-291

DOI: 10.1016/j.insmatheco.2012.03.013

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