2021/03/31 by Lin He, He, Lin, Zongxia Liang +6
Economics, Econometrics and Finance · Energy · Business, Management and Accounting · #Fiscal Policy and Economic Growth #Energy, Environment, and Transportation Policies #Financial Literacy, Pension, Retirement Analysis
paper · pdf · doi:10.48550/arxiv.2103.16800
In this paper,we study the individual's optimal retirement time and optimal\nconsumption under habitual persistence. Because the individual feels equally\nsatisfied with a lower habitual level and is more reluctant to change the\nhabitual level after retirement, we assume that both the level and the\nsensitivity of the habitual consumption decline at the time of retirement. We\nestablish the concise form of the habitual evolutions, and obtain the optimal\nretirement time and consumption policy based on martingale and duality methods.\nThe optimal consumption experiences a sharp decline at retirement, but the\nexcess consumption raises because of the reduced sensitivity of the habitual\nlevel. This result contributes to explain the "retirement consumption puzzle".\nParticularly, the optimal retirement and consumption policies are balanced\nbetween the wealth effect and the habitual effect. Larger wealth increases\nconsumption, and larger growth inertia (sensitivity) of the habitual level\ndecreases consumption and brings forward the retirement time.\n