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Retirement spending and biological age. (English) Zbl 1401.91519

Summary: We solve a lifecycle model in which the consumer’s chronological age does not move in lockstep with calendar time. Instead, biological age increases at a stochastic non-linear rate in time like a broken clock that might occasionally move backwards. In other words, biological age could actually decline. Our paper is inspired by the growing body of medical literature that has identified biomarkers which indicate how people age at different rates. This offers better estimates of expected remaining lifetime and future mortality rates. It isn’t farfetched to argue that in the not-too-distant future personal age will be more closely associated with biological vs. calendar age. Thus, after introducing our stochastic mortality model, we derive optimal consumption rates in a classic framework adjusted to our proper clock time [M. E. Yaari, “Uncertain lifetime, life insurance, and the theory of the consumer”, Rev. Econ. Stud. 32, No. 2, 137–150 (1965; doi:10.2307/2296058)]. In addition to the normative implications of having access to biological age, our positive objective is to partially explain the cross-sectional heterogeneity in retirement spending rates at any given chronological age. In sum, we argue that neither biological nor chronological age alone is a sufficient statistic for making economic decisions. Rather, both ages are required to behave rationally.

MSC:

91G10 Portfolio theory
91B30 Risk theory, insurance (MSC2010)
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