Lifetime Consumption and Investment: Retirement and Constrained Borrowing

33 Pages Posted: 13 Jan 2005 Last revised: 10 Apr 2010

See all articles by Hong Liu

Hong Liu

Washington University in St. Louis - Olin Business School; Fudan University - China Institute of Economics and Finance

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Date Written: August 30, 2009

Abstract

Retirement flexibility and inability to borrow against future labor income can significantly affect optimal consumption and investment. With voluntary retirement, there exists an optimal wealth-towage ratio threshold for retirement and human capital correlates negatively with the stock market even when wages have zero or slightly positive market risk exposure. Consequently, investors optimally invest more in the stock market than without retirement flexibility. Both consumption and portfolio choice jump at the endogenous retirement date. The inability to borrow limits hedging and reduces the value of labor income, the wealth-to-wage ratio threshold for retirement, and the stock investment.

Keywords: Voluntary Retirement, Mandatory Retirement, Investment, Consumption

JEL Classification: D11, D91, G11, C61

Suggested Citation

Liu, Hong and Dybvig, Philip H., Lifetime Consumption and Investment: Retirement and Constrained Borrowing (August 30, 2009). Journal of Economic Theory, Forthcoming, AFA 2005 Philadelphia Meetings Paper, Available at SSRN: https://ssrn.com/abstract=647844

Hong Liu

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

Fudan University - China Institute of Economics and Finance ( email )

China

Philip H. Dybvig (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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