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Optimal retirement time under habit persistence: what makes individuals retire early?

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  • An Chen
  • Felix Hentschel
  • Xian Xu

Abstract

As the effective labor market exit observed in most OECD countries is lower than the corresponding official retirement age, the question concerning the driving factors for an early retirement decision arises. This paper incorporates the optimal retirement decision in an optimal consumption and asset allocation problem in order to analyze, among others, the effect of habit forming preferences and diverse leisure preferences for earlier retirement. We compare two possible situations for the retirement phase: (a) the individual is allowed to freely consume and invest; (b) he annuitizes his wealth at retirement and consumes the annuity income. We find that early retirement is optimal if leisure gain through earlier retirement is highly appreciated or the standard of living (habit level) is low. Additionally, our numerical results show that high initial wealth or low labor income lead to early retirement, confirming observations of Fields & Mitchell.

Suggested Citation

  • An Chen & Felix Hentschel & Xian Xu, 2018. "Optimal retirement time under habit persistence: what makes individuals retire early?," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2018(3), pages 225-249, March.
    • Handle: RePEc:taf:sactxx:v:2018:y:2018:i:3:p:225-249
    DOI: 10.1080/03461238.2017.1339634
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    Cited by:

    1. Ferrari, Giorgio & Zhu, Shihao, 2023. "Optimal Retirement Choice under Age-dependent Force of Mortality," Center for Mathematical Economics Working Papers 683, Center for Mathematical Economics, Bielefeld University.
    2. Giorgio Ferrari & Shihao Zhu, 2023. "Optimal Retirement Choice under Age-dependent Force of Mortality," Papers 2311.12169, arXiv.org.
    3. Guan, Guohui & Liang, Zongxia & Ma, Xingjian, 2024. "Optimal annuitization and asset allocation under linear habit formation," Insurance: Mathematics and Economics, Elsevier, vol. 114(C), pages 176-191.

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