Stochastic Optimal Strategies for Catastrophe-Adjusted Wealth Allocation in Retirement Planning: Consumption–Bequest Trade-Offs under Systemic Shocks

Households in frontier markets face a persistent and multifaceted dilemma: how to optimally allocate scarce wealth between present consumption needs and the preservation of intergenerational bequest, while navigating the compounding effects of catastrophic risks, macroeconomic volatility, shallow and illiquid capital markets, and fragile institutional environments. This paper develops and simulates a stochastic dynamic optimization model, calibrated to Ghana, that captures wealth evolution under explicit consumption-bequest trade-offs and portfolio adjustments across risky assets, risk-free instruments, and insurance products. The framework incorporates a latent Poisson-driven process for catastrophic shocks, macroeconomic covariates such as exchange-rate dynamics and inflationary pressures, and systemic instabilities that amplify household vulnerability. Resilience is further mediated through financial protection mechanisms, particularly life insurance, which functions as a buffer against catastrophic wealth reversals and ensures continuity of intergenerational transfers. The model is estimated using a Bayesian Metropolis-within-Gibbs procedure, which allows for joint inference on parameters and credible interval estimation of wealth trajectories, thereby capturing the full extent of uncertainty in allocation paths rather than relying on fragile point estimates. Simulation results demonstrate that while optimal strategies tilt toward risky assets in the early years to maximize long-term accumulation, catastrophic events and exchange-rate volatility can sharply erode bequest potential unless actively mitigated by insurance uptake, de-risking allocations, and supportive macroeconomic institutions. These findings have direct industry and policy relevance: asset managers and pension funds must design dynamic allocation products that adjust to regime shifts; insurers should innovate affordable catastrophe- and longevity-linked contracts tailored to frontier households; and policymakers should pursue exchange-rate stabilization, market deepening, and insurance subsidies to ensure broader financial resilience. By highlighting the nonlinear and interdependent roles of household behavior, financial protection, and systemic risks, this paper contributes novel insights into both academic modeling and practical policy design, demonstrating how inclusive financial development can safeguard intergenerational wealth transfers and enhance resilience in frontier economies under uncertainty.