A Dynamic Programming Model of Retirement Behavior

Abstract

This paper formulates a. modcl of retiremEnt behavior based or the o].ution to a stochastic dynamic programming problem.The workers objective is to maximi:e expected thscounted utiHty over his remaining lifetime.At each time period the worker chooses how much to consume and whether to work full-time, part-time, or exit the labor force.The model accounts for the sequential nature f the retirement decision problem, and the role of expectati one of uncertain future van abi es such as the worker's 4utue lifespan, health status, marital and family status, employment status, as well as earnins from employment, assets, end social security retirement, disability and medicare payments.This paper applies a. neeted fixed point" algorithm tha.t converts the dynamic programming problem into the problem of repeatedly recomputing the fixed point to a contracti on mappi n operator as a subroutine of a standard noni i near me i mum likelihood pr oQrarr.The goal of the paper-is to demonstrate that a fairly complex and realistic formulation cf the retirement problem cart be estimated using this algorithm and a current generati on supercomputer, the Cray-2.

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