The effects of pre-/post-retirement downside consumption constraints on optimal consumption, portfolio, and retirement

Abstract

We investigate the optimal consumption, portfolio, and voluntary retirement choice problem in which an agent faces both pre-/post-retirement downside consumption constraints. We obtain the closed-form solutions using the martingale method and analyze the effect of the constraints on the optimal policies. We observe that the retirement wealth level is monotonically decreasing with pre-retirement constraints, while it is monotonically increasing with post-retirement constraints. We also find that the post-retirement downside consumption constraint has a significant impact on pre-retirement optimal policies. However, the pre-retirement downside consumption constraint does not act on post-retirement optimal policies.