Optimal Retirement and Saving with Increasing Longevity

Abstract

We develop a simple life cycle optimizing model of retirement and savings. We show that, in theory, higher incomes lead to earlier retirement and higher savings while longer life spans lead to later retirement and lower savings. We calibrate our model using data from the United States and find that the model predicts that over the last century the effect of rising incomes has been twice as large as the effect of the secular rise in life expectancy.

Keywords: aging, health, retirement, savings

JEL Classification: J26, D91