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http://dx.doi.org/10.7737/MSFE.2014.20.2.013

Optimal Retirement Time and Consumption/Investment in Anticipation of a Better Investment Opportunity  

Shim, Gyoocheol (Department of Financial Engineering, Ajou University)
Publication Information
Management Science and Financial Engineering / v.20, no.2, 2014 , pp. 13-25 More about this Journal
Abstract
We investigate an optimal retirement time and consumption/investment policy of a wage earner who expects to find a better investment opportunity after retirement by being freed from other work and participating fully in the financial market. We obtain a closed form solution to the optimization problem by using a dynamic programming method under general time-separable von Neumann-Morgenstern utility. It is optimal for the wage earner to retire from work if and only if his wealth exceeds a certain critical level which is obtained from a free boundary value problem. The wage earner consumes less and takes more risk than he would without anticipation of a better investment opportunity.
Keywords
Retirement time; Consumption; Investment; Utility; Labor income; Investment opportunity;
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