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Asian Review of Financial Research, Vol., No..
pp.411~438
pp.411~438
How Should Individuals Make a Retirement Plan in the Presence of Mortality Risks and Consumption Constraints?
Bong-Gyu Jang Department of Industrial and Management Engineering, POSTECH, Republic of Korea
Taeyong Kim Morningstar Associates Korea, Republic of Korea
Seungkyu Lee Department of Industrial and Management Engineering, POSTECH, Republic of Korea
Hyeon-Wuk Tae Department of Industrial and Management Engineering, POSTECH, Republic of Korea
This paper investigates optimal retirement planning when Epstein-Zin type individuals 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, social securities, and defined-contribution retirement pensions, all of which are necessary to guarantee a minimal 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.
Bong-Gyu Jang
Taeyong Kim
Seungkyu Lee
Hyeon-Wuk Tae
This paper investigates optimal retirement planning when Epstein-Zin type individuals 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, social securities, and defined-contribution retirement pensions, all of which are necessary to guarantee a minimal 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.