Optimal retirement consumption with a stochastic force of mortality

DOI10.1016/J.INSMATHECO.2012.03.013zbMATH Open1284.91162arXiv1205.2295OpenAlexW2249610035MaRDI QIDQ2445342FDOQ2445342

Authors: Thomas S. Salisbury, Huaxiong Huang, Moshe Arye Milevsky 

Publication date: 14 April 2014

Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)

Abstract: We extend the lifecycle model (LCM) of consumption over a random horizon (a.k.a. the Yaari model) to a world in which (i.) the force of mortality obeys a diffusion process as opposed to being deterministic, and (ii.) a consumer can adapt their consumption strategy to new information about their mortality rate (a.k.a. health status) as it becomes available. In particular, we derive the optimal consumption rate and focus on the impact of mortality rate uncertainty vs. simple lifetime uncertainty -- assuming the actuarial survival curves are initially identical -- in the retirement phase where this risk plays a greater role. In addition to deriving and numerically solving the PDE for the optimal consumption rate, our main general result is that when utility preferences are logarithmic the initial consumption rates are identical. But, in a CRRA framework in which the coefficient of relative risk aversion is greater (smaller) than one, the consumption rate is higher (lower) and a stochastic force of mortality does make a difference. That said, numerical experiments indicate that even for non-logarithmic preferences, the stochastic mortality effect is relatively minor from the individual's perspective. Our results should be relevant to researchers interested in calibrating the lifecycle model as well as those who provide normative guidance (a.k.a. financial advice) to retirees.

Full work available at URL: https://arxiv.org/abs/1205.2295

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zbMATH Keywords

stochastic mortalitylifecycle consumptionsurvival curve matching

Mathematics Subject Classification ID

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Cited In (25)

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• Optimal consumption, investment and housing with means-tested public pension in retirement
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• CARA UTILITY AND OPTIMAL RETIREMENT
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• Fair retirement under risky lifetime
• Asset allocation, sustainable withdrawal, longevity risk and non-exponential discounting
• Longevity-linked assets and pre-retirement consumption/portfolio decisions
• Retirement spending and biological age

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