Suppose the interest rate declines on certain types of investment accounts commonly used by older Americans planning for retirement. Further, suppose that the decline was a surprise, but now that it has happened, it is expected to persist for the foreseeable future. Consider a 62 year old worker who lives alone and is still working, who is determining when in the future to enter retirement, and who has a retirement account impacted by the interest rate change.

(a) How will the change in this interest rate aect this person's

present value of lifetime income (PVLI) at dierent potential re-

tirement ages?

(b) How will the change in interest rates impact the worker's optimal retirement age. Appeal to income and substitution effects in your answer.