Optimal Retirement with Borrowing Constraints and Forced Unemployment Risk

49 Pages Posted: 2 May 2014 Last revised: 26 May 2019

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Seyoung Park

Loughborough University - School of Business and Economics

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: October 6, 2015

Abstract

In this paper, we develop a new dynamic programming approach for solving an optimal retirement model in a two-dimensional incomplete market, which is induced by forced unemployment risk and borrowing constraints. We show that the two dimensions jointly affect an individual's optimal consumption, investment, and retirement strategies. Specifically, we find that there exists a certain endogenously determined wealth threshold over which it is optimal for an individual to enter retirement. Comparing to standard literature, the wealth threshold is lower in the presence of the two-dimensional market incompleteness, implying an earlier retirement than would be suggested by a complete market model. As a result, neglecting the two-dimensional market incompleteness can be costly to an individual who aims to attain her goal of optimal retirement.

Keywords: optimal retirement, forced unemployment risk, borrowing constraints, dynamic programming

JEL Classification: C61, E21, G11

Suggested Citation

Jang, Bong-Gyu and Park, Seyoung and Zhao, Huainan, Optimal Retirement with Borrowing Constraints and Forced Unemployment Risk (October 6, 2015). Available at SSRN: https://ssrn.com/abstract=2431545 or http://dx.doi.org/10.2139/ssrn.2431545

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Seyoung Park (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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