A0442
Title: Optimal retirement with disability risk
Authors: Jiwon Chae - Pohang University of Science and Technology (Korea, South) [presenting]
Bong-Gyu Jang - Pohang University of Science and Technology (Korea, South)
Seyoung Park - University of Nottingham (United Kingdom)
Abstract: Long-term disability significantly changes an individual's financial planning and quality of life. We illustrate the effects by modeling lifecycle consumption and investment while considering disability risk and retirement. The high intensity of disability shock lowers the optimal retirement wealth level; therefore, it leads to early retirement. Our model shows that the income risk due to such a high disability shock can lower the consumption-to-wealth ratio. Moreover, we find that the optimal risky portfolio-to-wealth ratio is reduced when the possibility of disability events rises, and its drop gets even larger for the poor. Our analysis of the certainty equivalent wealth (CEW) implies that people with low initial wealth are willing to pay for a large portion of their wealth to eliminate the disability risk.