Novel Utility-Based Life Cycle Models to Optimise Income in Retirement
European Journal of Operational Research, Volume 299, Issue 1, pp. 346-361, 16 May 2022, DOI 10.1016/j.ejor.2021.08.048
77 Pages Posted: 19 Jun 2020 Last revised: 18 Jan 2022
Date Written: June 4, 2021
Abstract
The global shift towards defined-contribution pension schemes has been accompanied by asymmetric risks and new responsibilities for households to plan and fund effectively their own retirement over the years. In this study, expressing and combining preferences for consumption, investment, bequest, public pension entitlement and the choice of reverse mortgage products, we develop several utility-based life cycle models to facilitate the complex decision-making process that retired households are required to follow to optimise their retirement income. This optimal policy is given in the form of either an analytical or a numerical solution using stochastic dynamic programming. The timing of this paper coincides with the launch of a reverse mortgage style loan, offered by the Australian federal government and allowing retired households to receive an income stream by taking out a loan against the equity in their home. Calibration is performed using real Australian household data.
Keywords: Utility theory; Decisions analysis; Life cycle models; Retirement income; Reverse mortgage
JEL Classification: C61;C63; G22; E21; G40; D91
Suggested Citation: Suggested Citation