Retirement Flexibility and Portfolio Choice

Abstract:     
This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping - generations model. We analyze this interaction both in a partial - equilibrium and general - equilibrium setting. Retirement flexibility is often seen as a hedge against capital - market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened - and under some conditions even turned around - if not only capital-market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labor income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general-equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.

Number of Pages in PDF File: 48

Keywords: retirement (in) flexibility, portfolio allocation, risk, intratemporal substitution elasticity

JEL Classification: E21, G11, J26

working papers series