Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283463 
Year of Publication: 
2023
Series/Report no.: 
Center for Mathematical Economics Working Papers No. 683
Publisher: 
Bielefeld University, Center for Mathematical Economics (IMW), Bielefeld
Abstract: 
This paper examines the retirement decision, optimal investment, and consumption strategies under an age-dependent force of mortality. We formulate the optimization problem as a combined stochastic control and optimal stopping problem with a random time horizon, featuring three state variables: wealth, labor income, and force of mortality. To address this problem, we transform it into its dual form, which is a finite time horizon, three-dimensional degenerate optimal stopping problem with interconnected dynamics. We establish the existence of an optimal retirement boundary that splits the state space into continuation and stopping regions. Regularity of the optimal stopping value function is derived and the boundary is proved to be Lipschitz continuous, and it is characterized as the unique solution to a nonlinear integral equation, which we compute numerically. In the original coordinates, the agent thus retires whenever her wealth exceeds an age-, labor income- and mortality-dependent transformed version of the optimal stopping boundary. We also provide numerical illustrations of the optimal strategies, including the sensitivities of the optimal retirement boundary concerning the relevant model's parameters.
Subjects: 
Optimal retirement time
Optimal consumption
Optimal portfolio choice
Duality
Optimal stopping
Free boundary
Stochastic control
JEL: 
G11
E21
I13
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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