How Should Individuals Make a Retirement Plan in the Presence of Mortality Risks and Consumption Constraints

This paper investigates optimal retirement planning when investors desire to maintain a certain minimum level of consumption, which can be achieved only by a guaranteed income stream after retirement. Our model incorporates the subsistence level in consumption and social securities and defined-contribution retirement pensions, all of which are necessary to guarantee an income stream. Our model shows that the movements of the optimal risky investments might dramatically change with the subsistence level in consumption. Our numerical results show that the risky investment rate in the retirement pension can increase with the risk-free gross return rate and with the risk aversion level when the low risk-free rate and risk aversion level are both low. Furthermore, the risky investment rate in the retirement pension can decrease even when the market condition is favorable