Saving and investing for early retirement: A theoretical analysis |
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Authors: | Emmanuel Farhi Stavros Panageas |
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Institution: | 1. Department of Economics, Massachusetts Institute of Technology, Cambridge, MA 02142, USA;2. Finance Department, The Wharton School, University of Pennsylvania, Philadelphia, PA 19104, USA |
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Abstract: | We study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time. We show that investing for early retirement tends to increase savings and reduce an agent's effective relative risk aversion, thus increasing her stock market exposure. Contrary to common intuition, an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets, even when her income and the investment opportunity set are constant. The model predicts a decrease in risk aversion following strong market gains like those observed in the nineties. |
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Keywords: | E21 G11 G12 J23 |
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