Optimal Retirement with Long-Run Income Risk

61 Pages Posted: 16 Mar 2017 Last revised: 22 Nov 2022

See all articles by Shan Huang

Shan Huang

Georgia Institute of Technology

Seyoung Park

Nottingham University Business School

Jane Yoo

Ajou University - School of Business

Date Written: March 14, 2017

Abstract

We analyze an optimal portfolio problem where an individual receives non-traded labor income and has to decide on her allocation between a stock and a risk-free asset, as well as decide on the time when she goes into retirement. We find that adding long-run income risk modeled as a cointegration between log labor income and log stock price changes the retirement strategy and the optimal risky asset allocation mix. This helps explain the lack of stock-market participation by young individuals and a risky asset-allocation share that is increasing and concave in wealth. It also helps explain the empirical evidence that stock investment increases with retirement age, i.e., individuals who retire early invest less in the stock market.

Keywords: Long-Run Income Risk, Cointegration, Investment, Retirement

JEL Classification: C61, E21, G11

Suggested Citation

Huang, Shan and Park, Seyoung and Yoo, Jane, Optimal Retirement with Long-Run Income Risk (March 14, 2017). Available at SSRN: https://ssrn.com/abstract=2932653 or http://dx.doi.org/10.2139/ssrn.2932653

Shan Huang

Georgia Institute of Technology ( email )

800 W Peachtree St NW
ATLANTA, GA 30308
United States

Seyoung Park (Contact Author)

Nottingham University Business School ( email )

Nottingham University Business School
Jubilee Campus
Nottingham
United Kingdom
+44-7927-494518 (Phone)

Jane Yoo

Ajou University - School of Business ( email )

206 Worldcup-ro
Yeongtong-gu
Suwon
Korea, Republic of (South Korea)

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