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

See all articles by Bonsoo Koo

Bonsoo Koo

Monash Business School

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics

Yunxiao Wang

Monash University - Department of Econometrics and Business Statistics

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

Koo, Bonsoo and Pantelous, Athanasios A. and Wang, Yunxiao, Novel Utility-Based Life Cycle Models to Optimise Income in Retirement (June 4, 2021). European Journal of Operational Research, Volume 299, Issue 1, pp. 346-361, 16 May 2022, DOI 10.1016/j.ejor.2021.08.048, Available at SSRN: https://ssrn.com/abstract=3610545 or http://dx.doi.org/10.2139/ssrn.3610545

Bonsoo Koo (Contact Author)

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia
+61 3 9905 0547 (Phone)
+61 3 9905 5474 (Fax)

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Yunxiao Wang

Monash University - Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield East, 3145
Australia

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