Optimal Retirement with Unemployment Risks
Posted: 20 Aug 2011 Last revised: 22 Jul 2013
Date Written: October 13, 2011
Abstract
This paper investigates the optimal retirement of an individual in the presence of involuntary unemployment risks and borrowing constraints in a complete market with frictions. An intensity model and loading factors are used to illustrate these involuntary unemployment risks and frictions in unemployment insurance markets. Using reasonably calibrated parameters, we observe that high involuntary unemployment intensity and loading factors could be important explanations for the empirical findings emphasized in recent studies. We also find that an individual with high leisure demand after retirement reduces consumption during retirement and increases stockholdings as retirement time approaches.
Keywords: unemployment risk, involuntary retirement, optimal retirement, moderate equity holdings, retirement consumption puzzle
JEL Classification: J65, J26, E24, G11, D91, C61
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