Optimal time to enter a retirement village

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Abstract

We consider the financial planning problem of a retiree wishing to enter a retirement village at a future uncertain date. The date of entry is determined by the retiree’s utility and bequest maximisation problem within the context of uncertain future health states. In addition, the retiree must choose optimal consumption, investment, bequest and purchase of insurance products prior to their full annuitisation on entry to the retirement village. A hyperbolic absolute risk-aversion (HARA) utility function is used to allow necessary consumption for basic living and medical costs. The retirement village will typically require an initial deposit upon entry. This threshold wealth requirement leads to exercising the replication of an American put option at the uncertain stopping time. From our numerical results, active insurance and annuity markets are shown to be a critical aspect in retirement planning.
Original languageEnglish
Article number20
Pages (from-to)20-1-20-20
Number of pages20
JournalRisks
Volume5
Issue number1
DOIs
Publication statusPublished - 2017

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Bibliographical note

Copyright the Author(s) 2017. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

  • retirement village
  • optimal control
  • optimal stopping
  • HARA
  • American put option
  • long-term care needs
  • costs and products for the elderly
  • disability/health state transitions
  • life-cycle modelling related to the retirement phase

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