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Key Findings Details

Lifecycle Impacts of the Financial and Economic Crisis on Household Optimal Consumption, Portfolio Choice, and Labor Supply
Jing Jing Chai, Raimond H. Maurer, Olivia S. Mitchell and Ralph Rogalla
WP 2011-246

  • We examine how households may be affected by a dual financial and economic crisis, such as the one recently experienced, in the short- and long-run.
  • We develop a lifecycle model to explore how people might react to such shocks by adjusting their consumption/saving patterns, investment/annuitization paths, work hours, and retirement patterns.
  • When young households are hit badly by the financial/economic crisis, they must reduce their work effort during the crisis by up to 10 percent. Later in life, they must boost work hours substantially – over 20 percent at age 60, and must defer retirement by one year on average. Lifetime consumption is lower in their early 20s and even after age 70. They must save substantially more later in life to build up financial wealth and will have lower stock investment.
  • When older households are badly hit by unemployment and stock market shocks, they must substantially boost their work effort by over 20 percent in their early 60s. They must postpone retirement by about one year, on average. They experience consumption losses in the short-term as well as later in life. Withdrawal of financial assets during the crisis results in substantial cuts in withdrawals later in life.

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