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The impact of liquidity constraints and cashflows on the optimal retirement problem

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  • Ding, Guodong
  • Marazzina, Daniele

Abstract

In this work we analytically solve an optimal retirement problem, in which the agent optimally allocates consumption, leisure rate and invests in a risk-free and risky asset to maximize a gain function characterized by a power utility function of consumption and leisure, through the duality method. The model is general enough to be compatible with both lifetime debt repayments and pension plans. We impose different liquidity constraints and cashflows over different time spans and conduct a sensitivity analysis to discover the effect of this kind of constraint. We show that pre- and post-retirement constraints have opposite effects on optimal wealth threshold of retirement. Moreover, pre-retirement constraints do not impact on post-retirement control strategies, while the opposite does not hold true.

Suggested Citation

  • Ding, Guodong & Marazzina, Daniele, 2022. "The impact of liquidity constraints and cashflows on the optimal retirement problem," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003816
    DOI: 10.1016/j.frl.2022.103159
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    References listed on IDEAS

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    1. Dybvig, Philip H. & Liu, Hong, 2010. "Lifetime consumption and investment: Retirement and constrained borrowing," Journal of Economic Theory, Elsevier, vol. 145(3), pages 885-907, May.
    2. Guodong Ding & Daniele Marazzina, 2021. "Effect of Labour Income on the Optimal Bankruptcy Problem," Papers 2106.15426, arXiv.org.
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    Cited by:

    1. Daniele Marazzina, 2024. "Optimal retirement in presence of stochastic labor income: a free boundary approach in presence of an incomplete market," Papers 2407.19190, arXiv.org.

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