OPTIMAL CONSUMPTION AND PORTFOLIO SELECTION FOR RETIREES WITH THE GUARANTEE OF MINIMUM WELFARE

The optimal consumption and portfolio selection for retirees who participate in a defined benefit pension plan are investigated. The retiree is unable to get full pension if exogenous shock exists. In this case, we assume that government provides the retiree with the guarantee of minimum welfare. Using the dynamic programming principle, we discuss the properties of optimal consumption and investment strategies. Numerical examples are provided to illustrate the effects of guarantee of minimum welfare and other factors on the optimal strategies. We find that the guarantee of minimum welfare has various effects on optimal consumption and investment for the retiree.