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The effects of pre-/post-retirement downside consumption constraints on optimal consumption, portfolio, and retirement

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  • Lim, Byung Hwa
  • Lee, Ho-Seok
  • Shin, Yong Hyun

Abstract

We investigate the optimal consumption, portfolio, and voluntary retirement choice problem in which an agent faces both pre-/post-retirement downside consumption constraints. We obtain the closed-form solutions using the martingale method and analyze the effect of the constraints on the optimal policies. We observe that the retirement wealth level is monotonically decreasing with pre-retirement constraints, while it is monotonically increasing with post-retirement constraints. We also find that the post-retirement downside consumption constraint has a significant impact on pre-retirement optimal policies. However, the pre-retirement downside consumption constraint does not act on post-retirement optimal policies.

Suggested Citation

  • Lim, Byung Hwa & Lee, Ho-Seok & Shin, Yong Hyun, 2018. "The effects of pre-/post-retirement downside consumption constraints on optimal consumption, portfolio, and retirement," Finance Research Letters, Elsevier, vol. 25(C), pages 213-221.
    • Handle: RePEc:eee:finlet:v:25:y:2018:i:c:p:213-221
    DOI: 10.1016/j.frl.2017.10.029
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    References listed on IDEAS

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    Cited by:

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    3. Zhao, Guangchuan & Cao, Xinbang & Ma, Chao, 2020. "Accounting for horizontal inequity in the delivery of health care: A framework for measurement and decomposition," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 13-24.
    4. Ho-Seok Lee, 2021. "Life Insurance and Subsistence Consumption with an Exponential Utility," Mathematics, MDPI, vol. 9(4), pages 1-10, February.
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    6. Lin He & Zongxia Liang & Yilun Song & Qi Ye, 2021. "Optimal Retirement Time and Consumption with the Variation in Habitual Persistence," Papers 2103.16800, arXiv.org.
    7. Wang, Hao & Siu, Tak Kuen & Hu, Shujie & Wang, Ning, 2024. "Life-cycle model with subsistence consumption constraint and state-dependent utilities," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Portfolio selection; Voluntary retirement; Downside consumption constraints; Martingale method;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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