This paper explores an optimal investing problem for a retiree facing longevity risk and living standard risk. We formulate the optimal investing problem as an optimal portfolio choice problem under a time-varying risk capacity constraint. Under the specific condition on model parameters , we show that the value function is a C^2 solution of the HJB equation and derive the optimal investment strategy in terms of second-order ordinary differential equations.  The optimal portfolio is nearly neutral to the stock market movement if the portfolio's value is at a sufficiently high level ; but, if the portfolio is not worth enough to sustain the retirement spending, the retiree actively invests in the stock market for the higher expected return. In addition , we solve an optimal portfolio choice problem under a leverage constraint and show that the optimal portfolio would lose significantly in stressed markets. This paper shows that the time-varying risk capacity constraint has important implications for asset allocation in retirement.
This paper studies an optimal investing problem for a retiree facing longevity risk and living standard risk. We formulate the investing problem as a portfolio choice problem under a time-varying risk capacity constraint. We derive the optimal investment strategy under the specific condition on model parameters in terms of second-order ordinary differential equations. We demonstrate an endogenous number that measures the expected value to sustain the spending post-retirement. The optimal portfolio is nearly neutral to the stock market movement if the portfolio's value is higher than this number ; but, if the portfolio is not worth enough to sustain the retirement spending, the retiree actively invests in the stock market for the higher expected return. Besides , we solve an optimal portfolio choice problem under a leverage constraint and show that the optimal portfolio would lose significantly in stressed markets. This paper shows that the time-varying risk capacity constraint has important implications for asset allocation in retirement.
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explores
studies
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optimal
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an optimal
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Under the
We derive the optimal investment strategy under the
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, we show that the value function is a C^2 solution of the HJB equation and derive the optimal investment strategy
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We demonstrate an endogenous number that measures the expected value to sustain the spending post-retirement.
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at a sufficiently high level
higher than this number
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In addition
Besides