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Optimal Consumption and Portfolio Selection with Early Retirement Option

Author

Listed:
  • Zhou Yang

    (School of Mathematical Sciences, South China Normal University, Guangzhou, 510631, China)

  • Hyeng Keun Koo

    (Department of Financial Engineering, Ajou University, Yeongtong-gu, Suwon, 16499, Korea)

Abstract

In this paper we propose an approach to investigate a model of consumption and investment with a mandatory retirement date and early retirement option; we analyze properties of the optimal strategy and thereby contribute to understanding the interaction between retirement, consumption, and portfolio decisions in the presence of both the important features of retirement. In particular, we provide a characterization of the threshold of wealth as a function of time, and we show that it is strictly decreasing near the mandatory retirement date. The threshold is similar to the early exercise boundary of an American option in the sense that if the agent’s wealth is above or equal to the threshold level, then the agent immediately retires. We also provide comparative static analysis.

Suggested Citation

  • Zhou Yang & Hyeng Keun Koo, 2018. "Optimal Consumption and Portfolio Selection with Early Retirement Option," Mathematics of Operations Research, INFORMS, vol. 43(4), pages 1378-1404, November.
    • Handle: RePEc:inm:ormoor:v:43:y:2018:i:4:p:1378-1404
    DOI: 10.1287/moor.2017.0909
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    References listed on IDEAS

    as
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