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

DOI10.1016/J.INSMATHECO.2021.10.004MaRDI QIDQ2670116zbMATH OpenOpenAlexFDO

Authors Lin He, Zongxia Liang, Yilun Song, Qi Ye

Publication date 10 March 2022

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

Full work available at URL https://arxiv.org/abs/2103.16800

zbMATH Keywords

habitual persistencemartingale and duality methodsoptimal consumptionoptimal retirement timeretirement consumption puzzle

Mathematics Subject Classification ID

Actuarial mathematics (91G05)

Abstract: In this paper,we study the individual's optimal retirement time and optimal consumption under habitual persistence. Because 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 contributes to explain 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.

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Cited in

(11)

• Life-cycle welfare losses from rules-of-thumb asset allocation
• Asset allocation, sustainable withdrawal, longevity risk and non-exponential discounting
• Dynamic asset allocation with consumption ratcheting post retirement
• Optimal consumption and life insurance under shortfall aversion and a drawdown constraint
• Asset demands and consumption with longevity risk
• Optimal retirement time under habit persistence: what makes individuals retire early?
• Optimal consumption, life insurance and investment decision with habit formation
• Optimal Asset Allocation for Retirement Saving: Deterministic Vs. Time Consistent Adaptive Strategies
• An Extended Asset Replacement Model: Impacts of Taxation, Inflation and Technological Advancement on Optimal Asset Duration
• Optimal risk sharing and dividend strategies under default contagion: a semi-analytical approach
• Consumption-portfolio choice with subsistence consumption and risk aversion change at retirement

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