Life-Cycle Portfolio Choice with a Realistic Retirement Age Distribution
33 Pages Posted: 6 Mar 2008 Last revised: 8 Feb 2010
Date Written: February 1, 2010
This paper numerically solves the optimal life-cycle portfolio choice when the model is calibrated to match the empirical retirement age distribution: people tend to retire only starting from their 50s. The model shows that financial incentives for keeping investors in labor force and low leisure preference for young investors endogenously restrict investors from retiring early. Thus, this paper suggests a novel effect of the early retirement option on portfolio choice. As opposed to results from earlier models, the optimal portfolio share of stock does not increase monotonically prior to retirement. Wealthy investors might find it optimal to reduce the stock share in their early stage of life in order to decrease the possibility of having insufficient wealth for retirement when they are older. Thus, the model predicts either an increasing or a hump-shaped pattern for life-cycle stock holding, consistent with empirical observations.
Keywords: Portfolio choice, Early retirement, Pension
JEL Classification: G11, H11, J26
Suggested Citation: Suggested Citation