Asset allocation in later life

Purpose: To study optimal consumption, portfolio choice and retirement decisions jointly under the framework where economic agent has discretionary decision to enter the retirement. Originality: It is the first study which considers the agent’s utility follows Generalized Log utility form. Key literature / theoretical perspective: The methodology for deriving the model is defined by Karatzas and shereve (1998), Farhi and Panageas (2007), Shin et al. (2008). Design/methodology/approach: Closed form solutions are obtained by martingale transformation for the budget constraint. Free boundary methods solve the optimal stopping time or agent’s retirement time. Findings: By including the option to retire tends to decrease consumption levels and marginal propensity to consume before retirement, and increase agent’s exposures to risky asset as she prepares for retirement. After controlling for the higher risk aversion, the agent experiences the drop in consumption and risky asset exposures initially, however, as I show later on, as agent ages, the risky aversion factor gradually converges to zero. Research limitations/implications: Model is based on two crucial assumptions of complete market and agent have rational expectation, by relaxation of these, it will be remained as an open question for the further research. Practical and Social implications: Provide the guidance to Financial planner or Pension fund managers as the insights into the investment behavior of economic agent before and after retirement.