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How does retirement affect optimal life cycle portfolio allocation between stocks and bonds?

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  • Valentinas Rudys

    (Weber State University)

Abstract

Portfolio allocation decisions over the life cycle depend, among many factors, on the retirement income as well as risks and choices faced in retirement. However, due to computational complexity, many retirement factors are typically assumed away. By building on the standard life cycle investment-consumption model that includes a more realistic progressive retirement income program, I discuss how each aspect of retirement income affects optimal portfolio allocation over the life cycle. I find that all investors across all scenarios maintain high levels of stocks in their portfolios at a young age. However, investors who face low net replacement rates, risk of forced retirement, or retirement income uncertainty hedge these risks by accumulating higher private savings and reducing risky portfolio shares at an earlier age. In a realistic setting with early forced retirement risk and endogenous retirement timing, optimal equity portfolio share temporarily increases once the investor becomes eligible for retirement. Retirement income’s dependency on workers’ lifetime labor earnings is not, however, an important factor in portfolio allocation over the life cycle.

Suggested Citation

  • Valentinas Rudys, 2023. "How does retirement affect optimal life cycle portfolio allocation between stocks and bonds?," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 212-224, May.
    • Handle: RePEc:pal:assmgt:v:24:y:2023:i:3:d:10.1057_s41260-022-00298-6
    DOI: 10.1057/s41260-022-00298-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Saving; Portfolio allocation; Investing; Consumption; Life cycle; Retirement; Stocks; Bonds;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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