This study introduces a retirement decision into the classic Merton model. A familiar result is that you should retire if and when the marginal utility of another year's wages is equal to the disutility of work. A new result is that at the point of retirement your exposure to risky assets should not jump. Under power utility and constant time preference, the retirement timing problem has a closed form solution; the nine inputs to the formula in question give rise to nine comparative-static results on retirement timing. Further specialization of preferences, to log consumption utility and zero time preference, reduces the required number of inputs to four. Journal of Economic Literature Classification Numbers: E21, G11, J26.
- Retirement; life cycle model; optimal stopping problem