Retirement flexibility and portfolio choice

This paper explores the interaction between retirement exibility and portfolio choice in an overlapping-generations model. We analyse this interaction both in a partial-equilibrium and general-equilibrium setting. Retirement flexibility is often seen as a hedge against capital-market risks which justifies more risky assetportfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened – and under some conditions even turned around – if not only capital-market risks but also productivity risks are considered.Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns outthat general-equilibrium e ects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.

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