Current literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using data from the Health and Retirement Study, this paper finds that the forced retirement risk is both significant and highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.
This paper was published last fall in the Journal of Empirical Finance and submitted to GRI in January 2021. Please access the published paper as follows: Chen, Guodong, Minjoon Lee, and Tong-yob Nam. “Forced retirement risk and portfolio choice.” Journal of Empirical Finance 58 (2020): 293-315.