Safety first approach in a life cycle model

Since it was proposed by Roy (1952), the idea of safety first has seen an increasing popularity, especially in case of retirement. This thesis solves a life cycle model of consumption and portfolio choice in the presence of a safety first constraint on the intermediate consumption. Because of the absence of a closed-form solution for theoptimization problem, we impose an assumption that the investors are myopic and we use an approximation based on the log-linearization method in Campbell and Viceira (1999) and Viceira (2001). The model predicts the incorporation of the safety first idea into theindividual’s decision making has an impact on both the optimal asset allocation and consumption. The safety first concern depresses the consumption motive and raises the conservativeness of the portfolio choice, which partially provides an explanation for the ”limited stock holding”.