Optimal Consumption, Portfolio, and Retirement Under Implementation Delay

We develop a continuous-time model of optimal consumption, portfolio allocation, and early retirement that, to our knowledge, is the first to incorporate an implementation delay —a fixed lag δ between the retirement decision and the actual cessation of labor and income. Using a dual-martingale approach, we obtain closed-form solutions and quantify how δ affects optimal behavior. For example, when δ increases from 0.5 to 2 years (baseline parameters: β=0.04, r=0.02, μ=0.08, σ=0.2, γ=3, kB=0.3, and ε=1), optimal pre-retirement consumption rises by approximately 7%, the risky asset share falls by about 5 percentage points, the expected retirement time increases by over 1 year, and the retirement wealth threshold xR grows by roughly 10%. These results provide policy-relevant insights for retirement systems where procedural lags can distort incentives and reduce welfare.

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Publication Details

Journal
Mathematics
Published
2025-08-22
DOI
https://doi.org/10.3390/math13172704
Primary Topic
Financial Literacy, Pension, Retirement Analysis
Type
article
Field-Weighted Citation Impact
0.00

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article

Optimal Consumption, Portfolio, and Retirement Under Implementation Delay

Geonwoo Kim, Junkee Jeon
Mathematics
Financial Literacy, Pension, Retirement Analysis
article

Optimal Consumption, Portfolio, and Retirement Under Implementation Delay

Geonwoo Kim, Junkee Jeon
article en

Abstract

We develop a continuous-time model of optimal consumption, portfolio allocation, and early retirement that, to our knowledge, is the first to incorporate an implementation delay —a fixed lag δ between the retirement decision and the actual cessation of labor and income. Using a dual-martingale approach, we obtain closed-form solutions and quantify how δ affects optimal behavior. For example, when δ increases from 0.5 to 2 years (baseline parameters: β=0.04, r=0.02, μ=0.08, σ=0.2, γ=3, kB=0.3, and ε=1), optimal pre-retirement consumption rises by approximately 7%, the risky asset share falls by about 5 percentage points, the expected retirement time increases by over 1 year, and the retirement wealth threshold xR grows by roughly 10%. These results provide policy-relevant insights for retirement systems where procedural lags can distort incentives and reduce welfare.

MathematicsVol. 13(17)
Seoul National University of Science and Technology (KR), Kyung Hee University (KR)
Seoul National University of Science and Technology
Openalex Percentile: Top 68%
Financial Literacy, Pension, Retirement Analysis
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