Portfolio-consumption choice problem with voluntary retirement and consumption constraints

Abstract

We study the investment–consumption choice problem with voluntary retirement and upside/downside consumption constraints in infinite horizon, which can be formulated as a two-phase mixed stochastic control problem including stopping time coupled with controls. By verification theorem, we show the strong solution of a fully nonlinear differential variational inequality, satisfying some special properties, is the value function of this problem. Then we eliminate the nonlinearity through Legendre transformation, and obtain the closed-form formulas of the optimal investment–consumption feedback strategy, the optimal retirement strategy and the value function by solving the dual equation. Since the introduction of consumption constraints, these formulas are both segmented and semi-explicit, and bring certain difficulties to the analysis of the properties of the optimal strategies and the value function. The regularity of the feedback strategy and the value function are obtained, as well as their monotonicity or non-monotonicity with respect to various parameters are discussed by some stochastic analysis methods and differential equation techniques.