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In this paper,we study the individual's optimal retirement time and optimalconsumption under habitual persistence. Because the individual feels equallysatisfied with a lower habitual level and is more reluctant to change thehabitual level after retirement, we assume that both the level and thesensitivity of the habitual consumption decline at the time of retirement. Weestablish the concise form of the habitual evolutions, and obtain the optimalretirement time and consumption policy based on martingale and duality methods.The optimal consumption experiences a sharp decline at retirement, but theexcess consumption raises because of the reduced sensitivity of the habituallevel. This result contributes to explain the "retirement consumption puzzle".Particularly, the optimal retirement and consumption policies are balancedbetween the wealth effect and the habitual effect. Larger wealth increasesconsumption, and larger growth inertia (sensitivity) of the habitual leveldecreases consumption and brings forward the retirement time.

Optimal Retirement Time and Consumption with the Variation in Habitual Persistence