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Novel utility-based life cycle models to optimise income in retirement

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  • Koo, Bonsoo
  • Pantelous, Athanasios A.
  • Wang, Yunxiao

Abstract

The global shift towards defined-contribution pension schemes has been accompanied by asymmetric risks and new responsibilities for households to plan and fund effectively their own retirement over the years. In this study, expressing and combining preferences for consumption, investment, bequest, public pension entitlement and the choice of reverse mortgage products, we develop several utility-based life cycle models to facilitate the complex decision-making process that retired households are required to follow to optimise their retirement income. This optimal policy is given in the form of either an analytical or a numerical solution using stochastic dynamic programming. The timing of this paper coincides with the launch of a reverse mortgage style loan, offered by the Australian federal government and allowing retired households to receive an income stream by taking out a loan against the equity in their home. Calibration is performed using real Australian household data.

Suggested Citation

  • Koo, Bonsoo & Pantelous, Athanasios A. & Wang, Yunxiao, 2022. "Novel utility-based life cycle models to optimise income in retirement," European Journal of Operational Research, Elsevier, vol. 299(1), pages 346-361.
    • Handle: RePEc:eee:ejores:v:299:y:2022:i:1:p:346-361
    DOI: 10.1016/j.ejor.2021.08.048
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    Cited by:

    1. Been, Jim & van Ewijk, Casper & Knoef, Marike & Mehlkopf, Roel & Muns, Sander, 2024. "Households’ heterogeneous welfare effects of using home equity for life cycle consumption," The Journal of the Economics of Ageing, Elsevier, vol. 27(C).
    2. Minney, Aaron & Zhu, Zili & Guo, Ying & Li, Jiaming & Toscas, Peter & Koo, Bonsoo & Pantelous, Athanasios A., 2022. "Using the pension multiple to measure retirement outcomes," Finance Research Letters, Elsevier, vol. 49(C).
    3. Vieira, Kelmara Mendes & Rosenblum, Tamara Otilia Amaral & Matheis, Taiane Keila, 2022. "And tomorrow, how will it be? Developing a Financial Preparation for Retirement Scale (FPRS)," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    4. Barucci, Emilio & Biffis, Enrico & Marazzina, Daniele, 2023. "Health insurance, portfolio choice, and retirement incentives," European Journal of Operational Research, Elsevier, vol. 307(2), pages 910-921.
    5. Dong, Ming & Mao, Shunjie & Li, Shan, 2023. "Supplier's technology upgrading investment strategy considering product life cycle," International Journal of Production Economics, Elsevier, vol. 263(C).

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