We study optimal portfolio, consumption-leisure and retirement choice of an infinitelylived
economic agent whose instantaneous preference is characterized by a constant elasticity
of substitution(CES) function of consumption and leisure. We integrate in one
model the optimal consumption-leisure-work choice, optimal portfolio selection, and the
optimal stopping problem in which the agent chooses her retirement time. The economic
agent derives utility from both consumption and leisure, and is able to adjust her supply
of labor flexibly above a certain minimum work-hour, and also has a retirement option.
We solve the problem analytically by considering a variational inequality arising from the
dual functions of the optimal stopping problem. The optimal retirement time is characterized as the first time when her wealth exceeds a certain critical level. We provide the
critical wealth level for retirement and characterize the optimal consumption-leisure and
portfolio policies before and after retirement in closed forms. We also derive properties of
the optimal policies. In particular, we show that consumption in general jumps around
retirement.
Keywords : Consumption, leisure, portfolio selection, retirement, CES utility, labor
income.