Preprint Article Version 1 This version is not peer-reviewed

Optimal Time to Enter a Retirement Village

These authors contributed equally to this work.
Version 1 : Received: 12 December 2016 / Approved: 12 December 2016 / Online: 12 December 2016 (11:18:16 CET)

A peer-reviewed article of this Preprint also exists.

Zhang, J.; Purcal, S.; Wei, J. Optimal Time to Enter a Retirement Village. Risks 2017, 5, 20. Zhang, J.; Purcal, S.; Wei, J. Optimal Time to Enter a Retirement Village. Risks 2017, 5, 20.

Journal reference: Risks 2017, 5, 20
DOI: 10.3390/risks5010020

Abstract

We consider the financial planning problem of a retiree wishing to enter a retirement village at a future uncertain date. The date of entry is determined by the retiree's utility and bequest maximisation problem within the context of uncertain future health states. In addition, the retiree must choose optimal consumption, investment, bequest and purchase of insurance products prior to her full annuitisation on entry to the retirement village. A hyperbolic absolute risk-aversion (HARA) utility function is used to allow necessary consumption for basic living and medical costs. The retirement village will typically require an initial deposit upon entry. This threshold wealth requirement leads to exercising the replication of an American put option at the uncertain stopping time. From our numerical results, active insurance and annuity markets are shown to be a critical aspect in retirement planning.

Subject Areas

retirement village; optimal control; optimal stopping, HARA, American put option; long-term care needs, costs and products for the elderly; disability/health state transitions; life-cycle modelling related to the retirement phase

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