Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts

33 Pages Posted: 16 Jun 2009 Last revised: 15 Sep 2010

See all articles by Jingjing Chai

Jingjing Chai

Goethe University Frankfurt - Department of Finance

Wolfram J. Horneff

Goethe University Frankfurt - Department of Finance

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2009

Abstract

This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples' equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, if we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.

Suggested Citation

Chai, Jingjing and Horneff, Wolfram and Maurer, Raimond and Mitchell, Olivia S., Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts (June 2009). NBER Working Paper No. w15079. Available at SSRN: https://ssrn.com/abstract=1418937

Jingjing Chai

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Wolfram Horneff

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Gr├╝neburgplatz 1
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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