Life-Cycle Portfolio Choice with a Realistic Retirement Age Distribution

33 Pages Posted: 6 Mar 2008 Last revised: 8 Feb 2010

Fangyi Jin

Central University of Finance and Economics

Date Written: February 1, 2010

Abstract

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

Jin, Fangyi, Life-Cycle Portfolio Choice with a Realistic Retirement Age Distribution (February 1, 2010). Available at SSRN: https://ssrn.com/abstract=1098166 or http://dx.doi.org/10.2139/ssrn.1098166

Fangyi Jin (Contact Author)

Central University of Finance and Economics ( email )

China

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