How Should Individuals Make a Retirement Plan in the Presence of Mortality Risks and Consumption Constraints

28 Pages Posted: 19 Sep 2015 Last revised: 11 Apr 2016

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Taeyong Kim

Morningstar Associates Korea

Seungkyu Lee

Pohang University of Science and Technology (POSTECH) - Dept. of Industrial and Management Engineering

Hyeon-Wuk Tae

Pohang University of Science and Technology (POSTECH) - Dept. of Industrial and Management Engineering

Date Written: September 18, 2015

Abstract

This paper investigates optimal retirement planning when investors desire to maintain a certain minimum level of consumption, which can be achieved only by a guaranteed income stream after retirement. Our model incorporates the subsistence level in consumption and social securities and defined-contribution retirement pensions, all of which are necessary to guarantee an income stream. Our model shows that the movements of the optimal risky investments might dramatically change with the subsistence level in consumption. Our numerical results show that the risky investment rate in the retirement pension can increase with the risk-free gross return rate and with the risk aversion level when the low risk-free rate and risk aversion level are both low. Furthermore, the risky investment rate in the retirement pension can decrease even when the market condition is favorable.

Keywords: asset allocation, portfolio selection, consumption, subsistence level, portfolio constraint, defined contribution

JEL Classification: G11

Suggested Citation

Jang, Bong-Gyu and Kim, Taeyong and Lee, Seungkyu and Tae, Hyeon-Wuk, How Should Individuals Make a Retirement Plan in the Presence of Mortality Risks and Consumption Constraints (September 18, 2015). Available at SSRN: https://ssrn.com/abstract=2662383 or http://dx.doi.org/10.2139/ssrn.2662383

Bong-Gyu Jang (Contact Author)

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

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

Taeyong Kim

Morningstar Associates Korea ( email )

4F, Dabo (BBS: Buddism Broadcasting System) Bldg.
140 Mapo-dong
Seoul, Mapo-gu
Korea, Republic of (South Korea)

Seungkyu Lee

Pohang University of Science and Technology (POSTECH) - Dept. of Industrial and Management Engineering ( email )

Dep. Industrial and Management Engineering POSTECH
San 31 Hyoja-dong Nam-gu
Pohang, Kyung-buk 790-783
Korea
82-(0)10-2790-4237 (Phone)

Hyeon-Wuk Tae

Pohang University of Science and Technology (POSTECH) - Dept. of Industrial and Management Engineering ( email )

77, Cheongam-ro, Nam-gu, Pohang-si, Gyeongsangbuk-
Pohang si, 37673
Korea, Republic of (South Korea)

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