Optimal consumption, investment and housing with means-tested public pension in retirement
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Publication:2364003
Abstract: In this paper, we develop an expected utility model for the retirement behavior in the decumulation phase of Australian retirees with sequential family status subject to consumption, housing, investment, bequest and government provided means-tested Age Pension. We account for mortality risk and risky investment assets, and introduce a health proxy to capture the decreasing level of consumption for older retirees. Then we find optimal housing at retirement, and optimal consumption and optimal risky asset allocation depending on age and wealth. The model is solved numerically as a stochastic control problem, and is calibrated using the maximum likelihood method on empirical data of consumption and housing from the Australian Bureau of Statistics 2009-2010 Survey. The model fits the characteristics of the data well to explain the behavior of Australian retirees. The key findings are the following: First, the optimal policy is highly sensitive to means-tested Age Pension early in retirement but this sensitivity fades with age. Secondly, the allocation to risky assets shows a complex relationship with the means-tested Age Pension that disappears once minimum withdrawal rules are enforced. As a general rule, when wealth decreases the proportion allocated to risky assets increases, due to the Age Pension working as a buffer against investment losses. Finally, couples can be more aggressive with risky allocations due to their longer life expectancy compared with singles.
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Cites work
- scientific article; zbMATH DE number 48872 (Why is no real title available?)
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- Dynamic asset allocation when bequests are luxury goods
- Markov decision processes with applications to finance.
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- Wealth Inequality and Intergenerational Links
Cited in
(9)- Pensions, household saving, and welfare: A dynamic analysis of crowd out
- Household portfolios and financial preparedness for retirement
- Longevity risk and retirement income tax efficiency: a location spending rate puzzle
- Optimal life-cycle consumption and investment decisions under age-dependent risk preferences
- A bias-corrected least-squares Monte Carlo for solving multi-period utility models
- Lifetime consumption and investment with housing, deferred annuities and home equity release
- Optimal annuitisation, housing and reverse mortgage in retirement in the presence of a means-tested public pension
- The private value of public pensions
- Novel utility-based life cycle models to optimise income in retirement
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