Management Science and Financial Engineering

The Korean Operations Research and Management Science Society (한국경영과학회)
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Optimal Retirement Time and Consumption/Investment in Anticipation of a Better Investment Opportunity

  • Received : 2014.09.01
  • Accepted : 2014.10.06
  • Published : 2014.11.30
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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.

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References

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