We develop a general retirement framework in which optimal retirement decision can be adjusted by both short-run and long-run income risk. The generalized framework is found to alter both quantitative and qualitative features of existing retirement models.
Having generalized the retirement framework with the long-run income risk, we then investigate its effect on the optimal decision to buy more or fewer risky assets. Taking on more risk in the stock market by adjusting retirement timing is no longer applicable with the long-run income risk.
Rather, retirement flexibility makes the optimal portfolio invest less in the stock market than without the long-run income risk. Finally, we can explain the non-participation puzzle and empirically plausible portfolio share exhibiting an increasing and concave trend in wealth.