Optimal Consumption and Portfolio Selection with Early Retirement Option

Zhou Yang () and Hyeng Keun Koo ()
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Zhou Yang: School of Mathematical Sciences, South China Normal University, Guangzhou, 510631, China
Hyeng Keun Koo: Department of Financial Engineering, Ajou University, Yeongtong-gu, Suwon, 16499, Korea

Mathematics of Operations Research, 2018, vol. 43, issue 4, 1378-1404

Abstract: In this paper we propose an approach to investigate a model of consumption and investment with a mandatory retirement date and early retirement option; we analyze properties of the optimal strategy and thereby contribute to understanding the interaction between retirement, consumption, and portfolio decisions in the presence of both the important features of retirement. In particular, we provide a characterization of the threshold of wealth as a function of time, and we show that it is strictly decreasing near the mandatory retirement date. The threshold is similar to the early exercise boundary of an American option in the sense that if the agent’s wealth is above or equal to the threshold level, then the agent immediately retires. We also provide comparative static analysis.

Keywords: mandatory retirement; early retirement option; consumption; portfolio selection; variational inequality (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormoor:v:43:y:2018:i:4:p:1378-1404

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